By Gaurang Somaiya
Rupee appreciated marginally against the US dollar after the FM revised of the FY24 fiscal deficit target to 5.8% and also set the target for FY25 at 5.1%. Also, capex outlay was increased by 11% to a massive Rs.11.11 trillion suggests that continue focus remains on boosting infra growth.
On the domestic front, market participants remained cautious ahead of the important RBI policy statement that was released last week. The RBI in its policy meeting held rates unchanged and maintained its withdrawal of accommodative stance.
The RBI governor added that monetary policy must continue to be actively disinflationary. In terms of the projection of inflation and growth; inflation is projected to be 4.5% for the upcoming fiscal year 2024-25, with Q1 at 5%, Q2 at 4%, Q3 at 4.6%, and Q4 at 4.7%.
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On the other hand, GDP forecasts for Q1FY25 has been raised to 7.2% from 6.7%, Q2FY25 raised to 6.8% from 6.5%; Q3FY25 GDP growth forecast raised to 7.0% from 6.4%, while Q4FY25 GDP growth forecast has been pegged at 6.9%. Reaction on the rupee was marginally negative and closed the week lower also following weakness in domestic equities wherein selling has been to the tune of $3.4billion since the start of ’24.
On the domestic front, inflation number will be important to watch; expectation is that CPI could grow at a slower pace of 5.09% as compared to growth of 5.69% in the previous month. On the other hand, Industrial production number too will be released today and expectation is that it could remain unchanged in December as compared to the previous month.
Volatility in major crosses could remain elevated following a number of economic numbers that will be released from major economies. We expect the USDINR (Spot) to trade sideways but with a positive bias and quote in the range of 82.80 and 83.30.
Dollar rose to the highest level in 11-weeks against its major currencies following a promising labour market report that further fuelled bets of no rate cuts by the Fed at the March meeting. Powell also commented that the bank will monitor incoming data to set the timing of the easing cycle.
Data showed 353K additional jobs were created in the US against a projected 180K, indicating robust job market growth. Also, average Hourly Earnings for January were up by 0.6% and unemployment rate was steady at 3.7%. Continued improvement in US labour market is reducing expectations for early rate cuts by the US Fed, thereby boosting the greenback widely.
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Further supporting the dollar was January’s ISM Services PMI recorded 53.4, beating the consensus figure of 52 and last month’s 50.5. This week, from the US, market participants will be keeping an eye on the inflation, retail sales, housing and consumer sentiment to gauge a view for the greenback. Importantly, it will be the CPI data that could set the tone for the dollar for the week.
Expectation is that inflation could grow at a slower pace of 2.9% in January as compared to 3.2% in the previous month. Any uptick in inflation could support the dollar and extend its gains. We expect the Dollar Index to trade in the range of 103.20 and 104.80.
(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)
