Markets brace for heavy falls as Russia-Ukraine crisis escalates

Global developments

Risk sentiment deteriorated overnight as tensions between the West and Russia escalated over Ukraine. Russia has ordered the dispatch of troops to separatist-held areas in eastern Ukraine. This could likely invoke a response from the United States in the form of new sanctions. Shelters rallied overnight. Yields on US Treasuries have fallen about 7 to 8 basis points in the long term. It is possible that the Fed could recalibrate its tightening plans given the risks to growth related to geopolitical tensions. Crude jumped about 3.5% to $97 a barrel. Gold broke through the USD 1900 mark amid risk aversion. Safe-haven currencies JPY and CHF strengthened. The dollar is also stronger against commodity, emerging market and Asian currencies. US stocks were closed yesterday for a holiday. Asian stocks are down with Shanghai down 1.5% and HangSeng down 3.3%.

National developments

Shares

The Nifty ended down 0.4% yesterday at 17206.

Bonds and Rates

Gsec yields ended up a few basis points across the curve yesterday, with the benchmark 10-year yield ending at 6.70%. Today, the impact of falling US Treasury yields may be offset by higher crude prices. Money market rates could be around 5 to 7 basis points higher due to the USD/INR sell-buy swap announced by the RBI as it would draw liquidity out of the banking system.

USD/INR

The rupiah strengthened yesterday to 74.35 at some point before nationalized banks aggressively stepped in to buy dollars likely on behalf of the RBI. The rupiah eventually ended the session at 74.51. The RBI yesterday announced a 2-year USD/INR sell-buy swap for USD 5 billion. We could see the 1-year forward peak of around 12-15 basis points at around 4.20% following the announcement. We expect it to trade in a range of 74.60-74.90 with a bullish bias.

Strategy: Exporters are advised to cover levels near 75.10. Importers are advised to cover dips around 74.30-40. The 3M range for USDINR is 74.30-76.40 and the 6M range is 73.50-76.50.

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