The last week has been very volatile and messy for USDINR spot, the spot depreciated by nearly 2.5% this week. The vigorous and unpredictable move was mostly driven by the RBI policy. The RBIs quantitative easing programme led the rupee to depreciate, despite a sharp fall in the dollar index. Also, rising Covid-19 cases continue spiralling and are rapidly spreading geographically in India. The lockdown fears have also weighed on the local currency, and to a lesser extent, equity markets. India has banned vaccine exports officially, another negative for India internationally.

Meanwhile, both the greenback and bond yields are taking something of a breather after scaling multi-month peaks at the end of last month, powered by bets that an accelerating US recovery from the pandemic will lift inflation faster than Federal Reserve policymakers anticipate. The Federal Reserve has been dovish and commented that they are in no rush in changing the status quo. Also, the Fed policymakers believe that inflation will remain moderate, but in our view, the pandemic-related scarring and supply constraints will keep inflation elevated for some more time. This Wednesday, is the US CPI data, in spite of the Feds assurances of unwavering support, a pickup in inflationary pressure will be a test for the markets. The dollar and US treasury yield will trade with a strong footing, appreciating the USDINR spot if US inflation comes better than market expectations, this week.

Meanwhile, later today is Indias CPI data, we expect the CPI to remain elevated but within RBIs target range. A higher inflation number will create some caution as RBIs recent liquidity move to soften the impact of Covid-19 second wave, is eventually going to push inflation higher. So, we expect the rupee to remain fragile, and USDINR may trade in between 74.50-75.50. As seen in the below chart, the crucial resistance in the USDINR spot lies around the 75.20/75.25 zone above which the next resistance is at 75.40-75.60. Meanwhile, strong support is located at 74.75 and only consistent trading below 74.75 will push spot prices towards 74.50-74.25-74.15.