The INR – Indian Rupee has been weakening at a faster-than-expected pace in the last few months due to a record current-account deficit and the prospect of reduced U.S. monetary stimulus. The Rupee tumbled again to below 60 per US dollar levels in afternoon trade on Friday based on heavy dollar demand from oil companies and importers. The Rupee July futures hit 60.31 per dollar, down 0.58% from its previous close of 59.8925. Traders can expect support for the Rupee at around 60.468 levels, breaching which, the Indian currency could fall to 60.843 also. The Rupee had hit a lifetime record low of 61.2125 on Monday, 8 July 2013, after falling 4.9% in June, (down 9% in the past three months) and the most in the world. Global funds had cut their holdings of Indian notes by $8.1 billion following the Federal Reserve’s May 22, QE “Taper” signal.
In tandem with Global trends, India’s growth also seems to be losing some steam and additional downward pressure on the Rupee makes it all the more difficult for RBI – India’s central bank to add to its interest-rate cuts to support the economy and spur growth. Bond risk in India has also surged as the Rupee weakened sharply. The depreciation in the Rupee forced the Reserve Bank of India to refrain from adding to three interest-rate cuts this year that helped push the benchmark 10-year yield to a 44-month low in May. The Rupee after being smashed recently, will probably not fall further as fast as it has done in the past few months, but rather seems well poised for a real sharp bounce back in the near future. An index of wholesale prices fell to a 43-month low of 4.7% in May. The benchmark inflation rate probably rose to 4.94% in June. Factory output and consumer price inflation data due post market hours. The market has largely factored in status quo on rates on July 30 and only a sharp positive surprise on inflation may lead to some rate cut bets. Inflation is slowing and the real rates are quite high, so India remains attractive, especially when the external situation stabilizes. A point of worry though would be the sharp global rise in oil prices, which may stem the decline in inflation.
Reuters reported that, India’s Chief Economic Adviser Raghuram Rajan said on Friday all options, including issuing the country’s first sovereign bond issuance, are on the table to support the rupee. Finance ministry officials had been scheduled to meet foreign banks on Friday, three sources familiar with the meetings had told Reuters.
India’s government plans to meet as many as eight bankers as it weighs selling debt abroad to raise dollars and help steady the rupee, according to two Finance Ministry officials with direct knowledge of the matter. India’s Chief Economic Adviser Raghuram Rajan will chair the gathering, and Barclays Plc, Deutsche Bank AG and Bank of America Corp. will be among those present. Any issuance of sovereign dollar bonds for overseas investors would be the first in the nation’s history, while the country in 1998 and at the turn of the millennium sold foreign-currency debt to non-resident Indians. The rupee has rebounded 2.6% from its July 8 low after regulators took steps to curb speculation. The RBI barred banks from proprietary trading in currency futures and exchange-traded options, while SEBI – Securities and Exchange Board of India said it may raise margin requirements and cap open positions for such contracts. India’s central bank governor Duvvuri Subbarao said yesterday, “The rupee depreciation over the last six weeks has been because of global factors. It’s difficult to say how long that effect will persist because it’s factors beyond our control.”
Though there is no clear sign of turnaround in the Rupee yet, I would now rather bet for than against it. While near-term depreciation risks remain, the downside may not be much deeper going forward. Also the long-term outlook for the notes is better as the RBI will probably resume cutting rates when the rupee stabilizes and the emerging-market sell-off subsides. The Rupee exchange-rate will benefit as India’s current-account deficit (which widened to $87.8 billion in the fiscal year ended March) will narrow from a record of 4.8% of Gross Domestic Product in the year ended March 31 and as policy makers will take steps such as selling bonds to Indians living overseas to boost inflows. India has already undertaken massive measures to control the exploding current-account deficit by way of imposing major curbs on Gold imports – the second largest contributor to the deficit. Import duty on Gold has been enhanced to 8% from 2% in the last 12 months- a massive 400%.
“The Rupee is by far the world’s most-undervalued major currency on a fundamental basis,” Geoffrey Lunt, senior fixed-income product specialist at HSBC in Hong Kong, told Bloomberg in a July 8 telephone interview. “Even if it stays where it is, the yields on the bonds, are going to give you quite a handsome return.” – Bloomberg
HSBC Global Asset Management and Daiwa SB Investments Ltd. are attracted to India’s sovereign bonds, Asia’s best performers, as Barclays Plc predicts the rupee will rebound from a record low reached this week. Indian notes returned 6.1% in local-currency terms this year, compared with 4.8% for Philippine debt and a 12.9% loss in Indonesia, indexes compiled by HSBC Holdings Plc show. The rupee is 15% undervalued against the greenback, according to Barclays, which predicts the currency will strengthen to 59 per US dollar in about a month before extending gains.
Reuters also reported that U.S. Trade Representative Michael Froman urged India on Thursday to reverse course on policies that he said discriminated against American companies and were fraying relations between the world’s two largest democracies. “Let me stress that as a friend of India and one of the caretakers of our economic relationship, I am concerned about the investment and innovation environment in India,” Froman said in a speech to the U.S.-India Business Council.
Technically for the near term, the rupee remains weak till below 59.23 / US dollar. I expect the downside to remain limited to 62.20 and in an extreme case, till 63.19 and would prefer buying the rupee at dips now. A rise above the short term resistance of 59.23 could lead to 57.43 where it can face a stiff medium term resistance. However, the rupee may simply soar to 55.90 and then further only if it achieves a breakthrough above the 57.25 mark – the very same level which I had predicted a couple of months ago to be crucial for a further and a sharp decline to 60.40 and then 62.20. In the longer term of over 12 to 18 months, I expect the rupee to regain the levels of 51.85 and 49.60. These bold predictions are not simply based on the fundamentals regarding the rupee but also for the US Dollar. The long-postponed and unresolved US budget-deficit conflicts within the Congress and with the White House are likely to surface anew around September. What is being played out here is still part of the fiscal-crisis confrontation of July and August 2011, which almost collapsed the US dollar and brought about a downgrade in the sovereign credit rating of the United States. The issues never were resolved. They were put off until after the 2012 election, and other than for minimal sequestration, they remain in play, going into a post-Labor Day 2013 showdown.
For more in details on the US Dollar – refer to article: Market Shocks Ahead Should be Positive for Gold, Negative for US Dollar
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