By Gaurang Somaiya

Rupee extended its gains at the start of the week even after data released on the domestic front showed inflation rose 5.69% in December as compared to rise of 5.55% in the previous month. Growth in India’s industrial output slumped to 2.4% in November from October’s 16-month high of 11.6%. Gains for the currency was restricted following suspected RBI intervention and strength in the dollar against its major crosses. Global ratings agency Fitch affirmed India’s long-term foreign currency issuer default ratings at ‘BBB-’ with a stable outlook, but flagged that the country’s weak public finances were the “largest constraint” to the rating. The dollar strengthened against its major crosses and US treasuries rose above the 4% mark after a statement from one of the Fed officials, who outlined that the central bank would likely cut rates at a slower pace than markets are anticipating. The greenback gained also after retail sales in the US in November continued to grow. Data showed retail sales increased 0.6% for the month, buoyed by a pickup in clothing and accessory stores as well as online non-store businesses. The results were better than estimates of 0.4% growth.

Market participants are waiting for more updates from China as some sources suggest that the PBoC is looking to consider issuing debt under a special sovereign bond plan as Chinese authorities seek more money to finance intensifying efforts for shoring up the world’s second-largest economy. Weakness in the Chinese Yuan also contributed to the fall in the rupee; data showed the Chinese economy in Q4 reported growth of 5.2% as compared to estimates of 5.3% growth. Dollar strengthened on trimming expectation over a rate cut as early as March.

This week, on the domestic front, no major economic data is expected to be released and volatility could be curbed following RBI intervention. But at the same time, on the domestic front it’s going to be a relatively shortened week following the Republic Day holiday on Friday. On the global front, from the US, preliminary manufacturing and services PMI, advance GDP and core PCE index number will be important to watch. Bank of Japan policy will be releasing its policy statement and volatility could elevate on back of comments from the BoJ governor. For the USDINR, we continue to maintain a sideways bias and unless the range of 82.80 and 83.50 is not taken out momentum could be lacking in the currency.