3 key themes driving the Indian Rupee at the moment

Below are the 3 key themes driving the Rupee at the moment;

1. Fed tightening: Markets are coming to terms with the Fed's resolve to tame inflation. US real yields are inching higher and this is driving Dollar strength. Impact on USD/INR: FPIs have pulled out about Rs 150000crs (~USD 20bn) from domestic equities over the last 7 months 
2. Russia-Ukraine war: It's been almost two months since the time Russia invades Ukraine. There is no imminent de-escalation insight. This standoff is continuing to keep energy prices and food prices elevated. Impact on USD/INR: Every USD 10 per barrel increase in average crude prices for the year increases the annual import bill by USD 15bn. 
3. China lockdown: Full and partial lockdowns in several cities have resulted in further disruptions in global supply chains and have dampened the global growth outlook further.

Impact on USD/INR: The PBoC is looking to ease to support growth and this is causing the Yuan to weaken. Yuan depreciation would weigh on other Asian currencies including the Rupee

Outlook on Rupee: The Rupee is grappling with a triple whammy at the moment. There is pressure on the current account as well as the capital account. Higher crude prices completely alter domestic macros. 

With OPEC reluctant to increase supply and no immediate de-escalation insight on the Russia-Ukraine front, we could see crude prices remain elevated for longer. Until crude prices are correct, we could see the Rupee remains under pressure. However, we are not seeing runaway depreciation as yet as the RBI is using the war chest of Reserves to protect the Rupee. Selling Dollars also helps the RBI suck out Rupee liquidity which could help the RBI cap government bond yields as well by opening up the room to buy bonds. We could therefore see a gradual grind higher on USD/INR. We could see a sharp reversal if crude prices drop on any positive developments on the Russia-Ukraine front. 

Over the medium term, we see the Rupee trade in a 75.80-77.25 range. Exporters are advised to cover on upticks to 76.70-77.20. A Trailing Stop strategy could work well. Importers can look to hedge through RRs. This would help save carry if the Rupee remains sideways.