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In February, the Indian rupee weakened against the dollar and, for the month, closed at fresh record low levels. And in line with its past performance in March the rupee managed to appreciate against the dollar. The Reserve Bank of India (RBI) Governor in its previous policy meeting has been vocal and stated that the central bank wishes to curb the volatility of the rupee rather than protecting a level, either on the downside or on the upside, for the currency. It was not only the RBI that helped the rupee appreciate but at the same time in March the FIIs bought a total of $1.5billion (as on 18th March) in the equity segment. The rupee gained despite marginal fund outflows flows of $152million from the debt segment.
On the domestic front, India’s Union Budget triggered the appreciation move after the finance minister announced that the fiscal deficit could remain in control with the government estimate. Weaker-than-expected industrial production number in the last couple of months raised expectation that the RBI could cut rates before the next RBI policy meeting scheduled April 5. Inflation that the RBI continues to keep an eye on remained in check in February despite an uptick in prices of pulses.
Central Banks Continue To Ease
Last month, major central banks released their policy statement and most of them continued to remain on the easing path following volatility in the emerging markets that has weighed on the global growth. Starting with the ECB, the central bank lowered its benchmark rate to zero and also lowered its deposit rate further into the negative territory. In line with expectation, the central bank lowered its deposit rate to (-) 0.40% from (-) 0.30% and at the same time expanded its quantitative easing to €80 billion from €60 billion. The ECB also lowered its forecast for growth and inflation suggest that the steps taken previously by the central bank have not been as effective as expected previously. After the announcement the euro came under pressure against the dollar but despite the increase in QE the euro rebounded from its low.
On the other hand, Bank of Japan continues to hold rates near record lows and in its latest policy meeting the central bank governor hinted towards further rate cut in a view to support the economy. The BoJ had cut rates into negative territory in January as it stepped up its efforts to revive growth and pull Japan out of years of deflation.
In line with expectation in its March meeting, the Fed decided to hold after raising rates in December for the first time since 2006. The greenback came under pressure against its major crosses after the Fed lowered its forecast for growth and inflation. In the past, the central bank has been vocal about its focus on improving employment and also take steps to take inflation higher. June certainly seems the month when the Fed could raise rates but the central bank will continue to monitor the economic data that will be released in the coming months. Forecast figures suggest that the rate hike pace could be slow as two rate hikes compared to the four anticipated earlier. On the economic data front, inflation for February contracted 0.2% compared to unchange in the previous month. The Federal Reserve will continue to monitor economic numbers until the next meeting scheduled in April. Until the next policy meeting the Fed will have just one month’s economic numbers, employment and inflation figures, to monitor and to determine the overall strength in the economy.
The year 2016 had begun on a negative note with sell-off in global equities as well as in major commodities. But steps taken by major central banks have supported these riskier assets on lower levels. From base metals to energy, most of the commodities have started to rally since the start of March following steps taken by the central banks. The RBI will be releasing its policy statement on April 5, wherein expectation is high that the central bank could cut rates by 25bps that could extend gains for the rupee against the dollar. Fund flows in the Indian equity and debt segment could further support the rupee on lower levels.
On the global front, China’s GDP number will be an important number to watch for especially after the measures taken by the PBoC. A pickup in the real estate prices in China suggests that the PBoC’s stimulus is working its way in the real estate market. Under the banner of prudent policy, the Chinese central bank has cut rates six times since November, 2014 and at the same time has reduced the amount of cash that commercial lenders must hold as reserves. On the other hand, advance GDP number from the US will also be crucial to gauge further trend for the greenback against its major crosses.