If inflows in Indian capital markets continue combined with weakness in safe-haven assets such as US Treasury yields then rupee is likely to appreciate going forward.
The Indian rupee depreciated nearly 11 percent against the US dollar in 2018. The fall was on account of several global factors including the trade tensions between the US and China and the US Fed hiking interest rates by four times in 2018, which added strength to the US dollar.
However, the depreciation in rupee did not sustain throughout the year. The trend changed in the latter half of 2018 with rupee appreciating nearly 4 percent from Oct’18-Dec’18.
The turnaround was mainly on account of softening crude oil prices that led to domestic inflation cooling down during this phase. In this phase, Brent crude oil prices declined nearly 35 percent and CPI (consumer price index) inflation touched a low of 2.11 percent in Dec’18. Similar story continued in 2019 with CPI in India touching 2.05 percent in Jan’19.
Also in Reserve Bank of India's (RBI) latest meeting on February 7, the Monetary Policy Committee (MPC) decided to cut the interest rates by 25 bps to 6.25 percent citing a cool down in domestic inflation. The MPC also decided to change the stance from 'calibrated tightening' to 'neutral' in this policy meeting. Going ahead, according to the central bank officials, CPI inflation is likely to remain soft in the coming months.
In 2018, the USDINR currency pair was highly driven by International factors. The strength in the US dollar was driven by optimistic data sets from the US. US Core inflation was consistently above the 2 percent target set by the US Fed. In addition, the US was able to add an average of 186,000 jobs in 2018 as compared to 180,000 every month in the same period in 2017.
However, going forward in 2019, the outlook looks gloomy for US dollar as the Federal Open Market Committee (FOMC, the MPC equivalent of US Fed) is unlikely to continue on their rate hiking path citing a slowdown in US economy.
Meanwhile, the US and Chinese representatives were involved in extensive talks in Feb’19 to reach a trade deal between the two nations. At the end of the discussions, US President Donald Trump said the US has decided to extend the tariff deadline on China, which was to be earlier levied on March 1, 2019. This extension of tariff deadline came in as positive news for global markets.
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