Daily Market Commentary: Friday, August 13, 2012

Domestic and International Highlights:

The Indian Rupee opened at 55.24 levels against the dollar after closing at 55.28 levels on Friday. The Rupee gained 0.85% last week. The Asian peers are trading mixed as slowing economic growth in Japan added to signs of a global economy slowdown. The intraday range for the rupee is expected in the range of 55.15-55.50 levels.

After the IIP figures for June 2012 came in at -1.8% against a growth rate of 2.5% seen in May, the wholesale prices are expected to rise 7.37% in July from a year earlier, compared to 7.25% in June, as a below-average monsoon pushes up food prices. The markets are expecting rate cuts by the RBI given weak IIP growth numbers but we still feel inflation is priority.

As per Assocham, the India's exports target of USD 500 billion by 2013-14 is unlikely to be achieved as the exports may majorly slowdown and we may not see significant increase in the current fiscal due to weak demand in global markets.

The India's sovereign credit rating is at risk because of the high fiscal deficit and lower growth prospects. We expect the growth for the current financial year to be around 6%. Without addressing the issue of fuel subsidies fiscal consolidation doesn’t seem to be possible.

The 10 year benchmark yields drop by 8bps from highs of 8.25% to close last week at 8.17%. Bond markets reacted to a statement by the new FM, P. Chidambaram who said that fiscal and monetary policy should work in tandem. The Government bond yields will look to trade in an 8% to 8.20% range as the market goes into RBI’s September 2012 policy review. The government had auctioned Rs 15,000 crore of bonds last week and is scheduled to for the same this week as well.

Outlook: As suggested Importers cover for August near 55 levels. Exporters wait for covers close to 55.50 at least (Plan A). Exporters keep a stop loss of 54.80 (Plan B) in case rupee keeps appreciating to cover partially. Trend stays USD/INR bullish.

(Source: Corporate Communications Team, India Forex Advisors Pvt. Ltd.)