The Indian Rupee broke out of its recent ranges and how. A rally in dollar overseas spurred dollar demand in the domestic market and Rupee lost a whopping 1.90 percent in two trading sessions. Dollar bulls had taken heart after a report showed the U.S. economy rebounded sharply in the second quarter and prompting heavy dollar buying from state-run banks on behlaf of corporate as well as defense-related payments. The demand for the dollar had also been exacerbated as the stop losses triggered and some investors unwound short positions on the greenback. Rupee fell as low as 61.19 on Friday 1st August, its lowest level since 23rd April 2014. The end of the month is also typically marked by dollar buying from importers looking to meet trade commitments.
The rupee had been knocked out by sustained gains in the dollar, which was trading at just below a 10-month high against a basket of major currencies, although the Federal Reserve's affirmation of a broadly relaxed stance on the monetary policy tempered some of those gains. Still, the dollar index ended July with gains of 1.9 percent. Overall Rupee declined 0.75 percent in July, marking its second consecutive monthly fall, despite foreign investor buying shares and debt worth just over $6 billion, as per official data. For the month, the Indian unit traded in the range of 59.54 – 60.56 levels. In the forward segment 1mth, 3mth, 6mth and 12 mth annualized premia closed at 7.55%, 8.40%, 8.38% and 8.09% compared to its opening at 8.94%, 8.52%, 8.61% and 8.29% respectively.
Indian Stock Market
India's broader NSE index rose 1.4 percent in July to notch up its third consecutive monthly gain on confidence about Prime Minister Narendra Modi's government. However, Nifty fell nearly 1 percent on Thursday (31/7/2014), marking its biggest single-day fall in nearly 2-1/2 weeks, weighed down by profit booking by foreign investors and sell-off in global equities on back of announcements/data from US and Europe. NSE index ended at 7,721.30, retreating from a record 7,840.95 points on July 25. The benchmark BSE index ended at 25,894.97. During the month market witnessed FII inflows to the tune of $2.19 billion in equities and $3.83 billion in debt, making it total net inflows of $6.01 billion.
India's Macro Indicators
- India's foreign exchange reserves rose to $320.56 billion as of July 25, compared with $317.85 billion in the week earlier.
- India's fiscal deficit in the first quarter of the 2014/15 financial year touched 2,978.59 billion rupees ($49.2 billion), or 56.1 percent of the full-year target, government data showed on Thursday (31/7/2014). The deficit was 48.4 percent during the comparable period in the previous fiscal year. Net tax receipts were at 990.87 billion rupees in the first three months of the current fiscal year to March 2014, while total expenditure was about 4.14 trillion rupees.
- Indian factory activity expanded at its fastest pace in 17 months in July as firms responded to burgeoning new orders by increasing output even as input prices jumped sharply. The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 53.0 in July from 51.5 in June, its highest since February 2013.
RBI's Bi-Monthly Policy Statement 2014-2015 Highlights
In line with expectations Reserve Bank of India in its third Bi-Monthly Policy Statement 2014-2015, which appears to be slightly hawkish, left the key rates unchanged –
- Repo rate under the liquidity adjustment facility (LAF) was left unchanged at 8.0 per cent.
- Cash reserve ratio (CRR) of scheduled banks left unchanged at 4.0 per cent of net demand and time liabilities (NDTL).
- As expected Statutory liquidity ratio (SLR) of scheduled commercial banks was reduced by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning August 9, 2014.
- RBI also announced that it will continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
- Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent
The Central Bank while acknowledging the moderation in CPI headline inflation for two consecutive months, emphasized its commitment to the disinflationary path of taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. RBI said that while inflation at around 8 per cent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. The balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016, are still to the upside, warranting for a heightened state of policy preparedness to contain these risks if they materialise. It appears from the RBI’s accompanying statement that it will not rush into any rate cut, as it maintains a vigilant policy stance. However, given subdued inflation trends and the government’s commitment to fiscal consolidation, the odds of rate cut in early 2015 (if not sooner) are rising.
Outlook
Fundamental
On the domestic front, while it’s still too early to cheer, the macro muddle seen at the end of last month appears to be clearing. (1) Crude prices have come off (2) rainfall deficiency in July has narrowed to 21% from 43% in June (3) pro-active measures on the price front seem to be working. While fears of a drought remain, positive data surprises – factory output, car sales, exports – indicate that a continuation of industry/service trends could offset it. On the other hand, there are also risk in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. Weather officials said the momentum of July would continue till about August 10 and then slacken a bit. Augusts’ rains are important for healthy progress of kharif crops, mainly oilseeds and pulses. Any break for a long period might resurrect drought fears, as the overall shortfall is still within a danger zone. As per RBI’s assessment, in the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. While recent inflation prints have undershot RBI’s baseline expectations, ‘veggies’ are once again playing the party spoiler. Nonetheless, given government’s commitment to fiscal consolidation and containing inflation along with RBI, is keeping the markets hopeful. The Reserve Bank will act as necessary to ensure sustained disinflation. Market is also expecting that in the next few quarters the RBI could suggest to the Government to list government securities in an emerging market bond index to raise $20-25 billion from benchmark funds that track that index. Hence, keeping the above in perspective we maintain our broad Dollar/Rupee range of 59-62 with risk on and risk off environment swaying the Rupee in both directions.
On the domestic front, while it’s still too early to cheer, the macro muddle seen at the end of last month appears to be clearing. (1) Crude prices have come off (2) rainfall deficiency in July has narrowed to 21% from 43% in June (3) pro-active measures on the price front seem to be working. While fears of a drought remain, positive data surprises – factory output, car sales, exports – indicate that a continuation of industry/service trends could offset it. On the other hand, there are also risk in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. Weather officials said the momentum of July would continue till about August 10 and then slacken a bit. Augusts’ rains are important for healthy progress of kharif crops, mainly oilseeds and pulses. Any break for a long period might resurrect drought fears, as the overall shortfall is still within a danger zone. As per RBI’s assessment, in the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. While recent inflation prints have undershot RBI’s baseline expectations, ‘veggies’ are once again playing the party spoiler. Nonetheless, given government’s commitment to fiscal consolidation and containing inflation along with RBI, is keeping the markets hopeful. The Reserve Bank will act as necessary to ensure sustained disinflation. Market is also expecting that in the next few quarters the RBI could suggest to the Government to list government securities in an emerging market bond index to raise $20-25 billion from benchmark funds that track that index. Hence, keeping the above in perspective we maintain our broad Dollar/Rupee range of 59-62 with risk on and risk off environment swaying the Rupee in both directions.
Technical
USD/INR broke out of our expected technical level of 60.60 last week. However, the same was triggered by more of a sudden event risk emanating from US. A breakout above the resistance at a trend-line near 60.20-60.30 witnessed the pair turning positive and is sustaining above the same indicating renewed optimism in the market. 8-13-21-days EMAs have confirmed slightly positive signal. On daily time frame, RSI (14) is already way above the line of equilibrium and has entered the overbought territory showcasing good underline strength in the momentum for short term. However, the possibility of a corrective fall towards 60.70/60.40 still remains open in this week. On the downside the pair is likely to find crucial support near 60.40 followed by 60.25 levels whereas on the upside 61.40 followed by 61.80 are likely to act as good resistance areas. Week’s Range : 60.30 - 61.40. Trend : A choppy trading week, with more likelihood of Rupee settling down.