Daily Market Commentary: Tuesday, August 7, 2012

Domestic and International Highlights:

The Indian rupee opened at 55.30 levels against the dollar after closing yesterday at 55.52 levels. Rupee rose to near a one-week high on Monday on account of a global rally following improving U.S. jobs data.

The Asian peers are trading positive after Germany backed a European Central Bank bond- buying plan that may ease the region’s debt crisis. The intraday range for the rupee is seen between 55.20-55.70 levels.

The Finance Minister P. Chidambaram sparked optimism on Monday after saying that they would shortly announce a path of fiscal consolidation and reviewing tax provisions. The comments come ahead of the start of the monsoon parliament session on Wednesday; with investors hoping government would tackle the fiscal issues.

The ECB has barely used the SMP this year and has not bought any bonds for 21 weeks despite a severe intensification of the euro zone debt crisis, as the ECB grew increasingly wary of the risks involved and doubtful of its impact.

It is close to the ultimate ECB taboo of financing governments but many believe unrestricted purchases by the bank may be the only way to bring the debt crisis under control in the short term. Details of the new program still need to be worked out by ECB committees and the Governing Council has to take a formal decision to launch it.

The Indian bond yield fell 4 basis points on Monday after the finance minister said high interest rates are burdening borrowers and promised the government will shortly unveil fiscal consolidation measures. The benchmark 10-year bond yield fell 4 bps to 8.22%, after earlier falling to as low as 8.21%.

Outlook: USD/INR stays quite volatile. Importers cover near 55 levels. Exporters wait for covers close to 55.80 again. Trend stays USD/INR bullish.

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