Daily Market Commentary: Friday, August 17, 2012

Domestic and International Highlights:

The Indian Rupee opened at 55.69 levels after closing yesterday at 55.75 levels against the dollar. Rupee was seen weakening to 56.04 levels its lowest since 3rd Aug. The Asian peers rose as U.S. housing permits reaching a four-year high helped to temper concerns about the strength of a global recovery. The intraday range for the rupee is expected between 55.50- 55.90 levels.

The Reserve Bank of India will assess if the declining trend in inflation is sustainable and accordingly take decision on reducing interest rate. The Inflation based on Wholesale Price Index (WPI) declined to 6.87% in July from 7.25% in June. Still, it is much above the RBI's 5-6% comfort level. In its last month monetary policy review, RBI had kept key interest rate unchanged at 8% in view of high inflation.

The concern is to increase as drought due to a deficiency in monsoon season will push the government to spend more on relief for farmers. Rural demand for cheap fuel to drive irrigation pumps and tractors is further delaying a promised increase in subsidized diesel prices putting pressure on the government to hold the subsidies that is making the fiscal deficit at an elevated level.

The Standard & Poor's was the first credit agency to cut India's sovereign outlook to negative in April, followed by Fitch Ratings in June. Both have India at BBB-minus, the lowest investment-grade rating. Any failure to reduce the deficit target could make the country to lose its credit rating.

The FII’s has bought a net $1.7 billion in government debt between May and so far in August, bringing their total net purchases for the year to $4.8 billion. In equity foreign investors have reversed course since the beginning of July, buying a net $2.8 billion to bring their year-to-date buying to $10.3 billion. Huge panic selling would be inevitable if India's credit rating is downgraded, partly reversing the foreign inflows this year and pressuring a current account deficit which is already at a record of 4.5% of GDP.

The Euro is seen trading steady at 1.23 levels after German Chancellor Angela Merkel voiced support for ECB President Mario Draghi's crisis-fighting strategy on Thursday and appealed other European partners to move swiftly towards a closer integration of fiscal policies. The conclusion on the Euro crisis is still far as there are a lot of issues to be addressed. Even if a temporary solution is made it is expected to provide a small relief to the Indian Rupee as the poor macroeconomic fundamentals are at its edge.

The Indian Bond yield edged higher on Thursday as investors scaled back that the RBI will cut interest rates at its September policy meeting after global crude prices threatened to stoke inflation further. India's benchmark 10-year bond yield jumped 4 basis points to 8.26% from its previous close

Outlook: Exporters may start covering above 56 levels partially (Plan A). Exporters keep a stop loss of 55.40 (Plan B) in case rupee keeps appreciating to cover partially. Importers have already been advised to cover near 55-55.30 levels. Trend stays USD/INR pair bullish Target 56.50

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