WEEKLY SYNOPSIS: 17/12/2021

Currency Map:

Brent Crude closed at USD 73 VS prior week close of USD 76. Gold closed at USD 1798.Nifty closed at 16985 vs prior week close of 17511. 10 Year G-SEC Yield closed at 6.41%.

Major developments: USDINR traded in the 75.62-76.32 range and closed at 76.08 as against prior week close of 75.78. Rupee declined 0.39% w/w. EUR climbed 0.98% and GBP climbed 1.42% w/w against Rupee. Indian benchmark Equity index declined 3% w/w. 10 Year G-SEC Yield closed at 6.41%. 1 year fwd premia is at 4.55% p.a.

Rupee weakened, due to year end outflows and increasing trade deficit. However, LIC IPO inflows could soften Rupee back to 74.50 levels. With US Fed indicating three rate hikes next year, Rupee could swing in the 74.50-78.50 Zone next year.

On data front, Nov CPI was reported at 4.9%. Food inflation increased to 1.87 per cent in November from 0.85 per cent a month ago. The high-base effect is playing a key role in keeping headline CPI inflation lower than last year. IIP climbed 3.2% in Oct. Mfrg sector grew by 2%. Capital goods — an indicator of investment — contracted 1.1 per cent in October while consumer durables output contracted 6.1 per cent and consumer non-durables output grew just 0.5 per cent.

In Dec, FII’S have net sold Rs 7745 cr in Equity segment and have net sold Rs 3898 cr of debt. In this financial year, FII’S have net sold Rs 1069 Cr worth of Indian Equities and have bought Rs 16427 Cr worth of Indian debt. In 2020-21 financial Year, FII’S nett bought Rs 2,74,203 Cr of Equities and have sold Rs  42820 Cr in debt.

Global developments: The week development was dominated by Central bank rate decisions and spread of Omicron. As we enter into holiday season, the new variant is threatening to slow down Q1 growth.

 Inflation remained the focus of financial markets this week, with economic data providing continued evidence of accelerating price pressures.

U.S. Federal Reserve said it would end bond-buying stimulus in March to set up three interest rate increases next year to tackle heated inflation. “The economy no longer needs increasing amounts of policy support,” Fed Chair Jerome Powell said in a news conference after the conclusion of the two-day policy meeting. Fed has to contend with two competing forces- rising inflation and possible deterioration of public health. Fed is now reducing QE by USD 30 bn. If unemployment rate continues to decline and impact due to Omicron is short lived, Fed may walk the talk of increasing rates three times next year.

ECB left rates unchanged and confirmed ending PEPP purchases by March 2022. ECB upgraded its inflaton forecasts for the entire projection horizon. Headline CPI is expected to reach +3.2% y/y in 2022, before accelerating further to +4.8% in 2023. These are revised higher from +1.7% and +1.5%, respectively in September’s projectors. GDP growth forecasts are upgraded slightly higher to +5.1% y/y this year (Sep: +5%) but downgraded to +4.2% in 2022.

BoE surprised the markets by raising interest rates and maintains a hawkish tone. The central bank said it will review developments, including the impact of Omicron, in the February Monetary Policy Report, with focus on medium term prospects for inflation. There are “two-sided risks around inflation outlook in the medium term”. But, “some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably”.

BoJ kept short-term policy interest rate unchanged at -0.10%, and 10-year JGB target at around 0% without upper limit to purchases. It will continue to buy ETFs and J-REITs with upper limits of JPY 12T and JPY 180B respectively on annual paces.

Currency range forecast: USDINR: 74.60(support)-76.90(Resistance), EURINR: 83.50(support),86.50(Resistance), GBPINR: 99(support), 102.30,103.50- Resistance, JPYINR: 64-68.   

Suggestion: Cover USD import payables on dips to 75.20/74.60. Receivables can be monitored and hedging can be initiated at 76+. EURINR receivables can be hedged closer to 86+. GBPINR receivables hedging can be done at around 101.50+/102.50 

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