Rupee Quote by Sugandha Sachdeva, Vice President - Commodity & Currency Research, Religare Broking

The rupee had to contend with mixed cues this quarter. On one hand, the flow picture was pretty supportive of the rupee while on the other, the market was unable to digest the hawkish tilt of the Federal Reserve. Inflation sting in the US seems persistent and it is almost certain that Fed will have to change its ultra-dovish stance. However, the timing of scaling back its monetary policy will be tied closely to this week’s jobs report and how rapidly the US economy will grow. Our base case is that Fed will wait out before the impact of the Delta variant begins to play out and may not rush to scale back bond purchases. A likely hint of taper can be expected at Jackson Hole Summit in August, while the actual process may begin only in October-December. We are not expecting an interest rate hike before 2023, for the time being.  

Another crucial factor, which will weigh on the rupee, is higher crude oil prices. So far, the rupee has been fairly resilient to the uptick in crude oil prices but once Brent crosses $80 per barrel, we believe that we may see a sharp sell-off in the emerging market currencies, specifically the rupee. Higher crude oil prices will complicate woes for the Monetary Policy Committee as they may not be able to ignore domestic inflationary pressures for long, which coupled with domestic fiscal slippage concerns would further weigh on the domestic currency.  

For now, the 72.20 mark on the rupee is sacrosanct and we may not see the rupee breach this level any time soon. On the other hand, we are not expecting a sharp depreciation on the rupee below 75.50 levels, as RBI’s Forex buffer is quite strong. For July-September quarter, the rupee should trade in a broad band of 73-75.50.