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Share Written By
Rahul Gupta

Head of Currency Research

02 Feb 2021

The USDINR spot has continued to trade in the ascending channel with global risk sentiments wrangled over the size of Biden's fiscal stimulus package and India’s FY22 budget. India’s economic growth revival is still nascent and remains fragile so the FM Sitharaman unveiled an expansionary budget with a higher than expected fiscal deficit for the financial year ending 2022. The FM doubled healthcare spending and lifted limit on foreign investment in its vast insurance market to pull the economy out of a slump. The government pegged FY21 deficit at 9.5% compared to previous aim of 3.5%; while market consensus was 7%. On the other hand, India’s FY22 fiscal deficit is aimed at 6.8%, compared to previous aim of 3.3% and higher than the market consensus of 5.3%. This widening of budget deficit target led to a knee-jerk reaction on rupee and USDINR appreciated sharply, however the uptick in spot was limited as local stock market rejoiced.

The trend and volatility in USDINR spot depends on how RBI policy reacts to the budget outlook. With inflation being back under 6%, the odds of rate cuts resuming have increased, but in our view RBI will continue with the status quo this week. Any hints of RBI rut cut would be positive for local equity and Indian rupee. But until then events surrounding COVID-19, and development over US fiscal stimulus package will control the price action in USDINR spot.

Technically, crucial strong support in USDINR spot is located at 72.75 and consistent trading below 72.75 only we can see a dip towards 72.50. However, if it respected 72.75 then only a reversal is foreseen to find crucial resistance at 73.25-73.40-73.55.