Daily Market Commentary: Monday, August 6, 2012

Domestic and International Highlights:

The Indian Rupee opened stronger at 55.44 levels against the dollar after closing at 55.75 on Friday. The gain in rupee is mainly in account of the recovery in Euro. The intraday range for the rupee is expected in the range of 55.10-55.50 levels.

The Asian peers rose after creditors said Greece is making progress on meeting bailout terms and U.S. pay rolls climbed more than forecast. The Greece and its creditors agreed on the need for more budget cuts to comply with bailout terms after more than a week of meetings in Athens.

The positive news from Euro Zone is supporting the demand for global risk assets on the back of falling yields for Italian and Spanish debt and US treasury yield climbed up to 1.56%.

The European Commission ECB and IMF met with Greek Finance Minister in Athens at the conclusion of the meetings. The talks will determine whether Greece continues receiving funds from the country’s 240 billion Euros ($297 billion) of rescue packages.

In India, the summer drought declared on Thursday is a concern as that will keep food price inflation sticky, and is a chance that the government will delay meaningful fiscal reforms. India's non-manufacturing PMI was little changed, slipping to 54.2 in July from 54.3 in June. The data showed overseas orders for Indian goods fell for the first time in nine months reflecting the slowdown in global demand.

The Planning Commission committee has cautioned that economic growth could slip below 6% in the absence of reforms by the government. The Government is expected to start the process of disinvestment in the public sector in the month of September. The concern over the growth and would be a major hurdle between the plan of the government.

The Indian bond yield rose 4 bps to close at 8.26%. India raised 150 billion ($2.7 billion) in debt on Friday at decent demand. The government has another 600 billion rupees of supply lined up during the month. The government is scheduled to auction Rs 15,000 crores of bonds this week. The country has budgeted 3.7 trillion rupees of borrowing in the first half of the fiscal year, and signs of fiscal indiscipline could have a big impact on bond markets.

The Liquidity which was in deficit over the last two years is showing signs of getting into  positive territory. Liquidity has been easing steadily since May 2012 with average weekly bids for repo coming off from levels of Rs 100,537 crores to levels of Rs 39,000 crores as of 3rd August 2012. The steady fall in liquidity is due to RBI government bond purchases of over Rs 80,000 crores since April 2012 and due to banks deposits growing much faster than credit growth in the April to July 2012 period.

Outlook: USD/INR stays quite volatile with 2% moves every second day. Importers cover near 55 levels. Exporters wait for covers close to 55.80 again.

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