Indian Rupee hit by volatility post CPI, IIP data; here's what is driving the domestic currency

The Indian Rupee was trading very volatile against US benchmark dollar index at interbank forex market. In early opening, the domestic currency fell 13 paise to 67.62 against the American currency due to increased demand for the dollar from importers amid foreign fund outflows and rising retail inflation. Investors are trading cautiously in this currency after the CSO presented macroeconomic data of Consumer Price Index (CPI) inflation for May month and Index of Industrial Production (IIP) for April month. Both macro indicator rose in the latest month, however, this was welcomed very positively by domestic indices, which supported Indian rupee to reverse losses and trade slightly higher by touching 67.480 than the US dollar so far in the day.  

However, at around 1226, the Indian currency has once again weakened at 67.616 down 0.011 points or 0.01% against US dollar. In previous trading session, the rupee closed 7 paise down at 67.49 against the US currency.

Anindya Banerjee, analysts at Kotak Institutional Equities said, "Rupee opened weak, around 67.60 levels on spot, as USD gained ground against majors like Euro, GBP and JPY. Going into the FOMC meeting a natural bid has emerged under the USD. However, this bid can evaporate, if US Fed fails to sound hawkish enough. The best case for USD shall be if Fed hints at 2 more hikes this year. USDINR can continue to drift higher alongwith the upward drift in USD against other currencies."

However, Banerjee added, " We would urge caution as event risk looms by way of FOMC. Intra-day buying on dips remains the trade, with stops below yesterday’s low of 67.28 levels on spot. Intermediate trend is upward and hence, buying on decline remains our preferred trade but incase the pair breaks down below 67.00 handle, we will revisit our view on USDINR." 

India's consumer price index (CPI) or retail inflation stood at 4.87% in the month of May 2018 - higher from 4.58% in April 2018 compared to 4.28% in March, 4.44% in February, and is moving towards 5.07% mark recorded in January 2018. Last year, CPI hovered near 2% to below 5%.

India's Industrial Production or factory output came in at 4.9% for the month of April 2018. The indicator recorded a growth rate of 4.4% in March 2018 month, which was surprisingly quite lower compared to growth of 7% in February 2018.

Banerjee said, " Higher growth and higher inflation, is not such a bad template, it smacks of reflation theme. However, it is more positive for stocks, then bonds. As growth improves for the rest of FY19 and inflation remains above RBI’s target of 4%, we can expect central bank to hike to rates by another 25 bps in either the August or October policy." 

Therefore, Banerjee explained, "Rising rates augurs well for the Rupee, but in a pre-election year, with geopolitical risk premia high, oil prices on the coil and financial market volatility being no longer dormant, the local unit may fail to gain much from this RBI hawkishness. Real rate theme may become a central theme in 2019, once the national elections conclude."

Moreover, the benchmark Sensex indices was trading at 35,807.70 above 115.18 points or 0.32%, whereas the Nifty surged by 26.30 points or 0.24% trading at 10,869.15.