US dollar likely for foreign fund inflows into Indian companies

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The USDINR pair made a gap-up opening at 75.14 levels and traded in the range of 74.96-75.16 with a downside bias. The pair finally closed at 75.00 levels. The RBI set the reference rate at 75.1082 levels. The USDINR pair slipped as foreign banks sold the US dollar likely for foreign fund inflows into Indian companies. Sentiment for the pair was further cooled off as domestic equity indices recovered from earlier losses in early Asian trade. 

Meanwhile, the dollar index remained elevated globally amid the rising number of cases of the Omicron variant of COVID-19 worldwide. Overnight indexed swap rates ended steady because traders refrained from placing large bets as they expect the swap rates to consolidate around the current levels. The unexpected variable rate reverse repo operation led traders to believe that the central bank is tightening the financial conditions by aggressively absorbing the liquidity through its liquidity management operations, a move that is seen nudging the money market rates higher.

At the current levels, the one-year swap rate indicates that the central bank may look to narrow down the liquidity adjustment facility corridor to 25 bps by as early as Feb, with short-term money market rates already moving towards the repo rate of 4%. Trade volumes have also been muted as offshore clients have stayed on the sidelines ahead of the year-end and Christmas holidays. Foreign banks, typically, close their books towards the end of the calendar and return to the market with fresh allocation for riskier emerging market assets from Jan onwards.

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