USD/INR marches towards 76.50 on downbeat market tone and boiling oil prices

• Indian rupee depreciates on rising oil prices and broader risk-aversion theme.
• Seven interest rate hikes by Fed in 2022 will squeeze the liquidity in the market significantly.
• Rising oil prices are likely to widen India’s fiscal deficit.

The USD/INR has decisively breached its previous upside hurdle of 76.00 and is marching swiftly towards 76.50 amid diminishing demand for risk-sensitive assets and rising oil prices.

The announcement of seven rate hikes by the Federal Reserve (Fed) in 2022 has undermined the demand for the Indian rupee. To tame the galloping inflation, Fed policymakers have decided to tap the aggressive tightening policy going forward. Additional six interest rate hikes in the US economy may squeeze the liquidity principally from the market and the growth prospects will remain questionable. This has featured a risk-off impulse in the market and investors have started pouring funds into the greenback.

It is worth notifying that the 10-year US Treasury yields have comfortably reached 2.33% amid rising odds of an interest rate hike by 50 basis points (bps) in May’s monetary policy from the Fed. The CME’s FedWatch Tool is showing 60% odds for a 50 bps interest rate hike in May’s Federal Open Market Committee (FOMC).

Meanwhile, the oil prices are surging sharply, which is posing additional pressure on the Indian rupee. Supply constraints due to sanctions on Russian oil imports are posing the risk of a wider fiscal deficit for India.

Going forward, investors will focus on Wednesday’s Fed Chair Jerome Powell’s speech, which will provide insights into the likely monetary policy action in May.