Daily Market Commentary: Wednesday, August 29, 2012

Domestic and International Highlights:

The Indian Rupee opened weaker at 55.69 levels after closing yesterday at 55.68 levels against the dollar. The Asian peers are trading lower while Euro trading steady at 1.25 levels. The Intraday range for the rupee is expected between 55.45-55.80 levels.

All eyes are fixed on Bernanke's speech on Friday at an annual Jackson Hole which precedes the Fed's September 12-13 policy meeting. We expect nothing major to be announced probably the same what he said over the last couple of months, which is simply that they will act, but only if conditions continue to deteriorate.

Investors have become less certain of getting any policy hint from Bernanke this week or strong monetary stimulus from the Fed's meeting next month, as data released over the past month has generally pointed to a modest U.S. recovery. Hopes are still alive that the European Central Bank will soon unveil measures to ease borrowing stress in struggling countries such as Spain and Italy after ECB President Mario Draghi cancelled his appearance at the Jackson.

Looking at the Indian continent, the RBI Governor believes that Inflation is still a big threat. The RBI has been successful in easing price pressures by reducing the inflation rate to 7% from 11%. But he said that various factors, including high commodity prices, the fiscal deficit and the monsoon, risk pushing it higher.

The RBI has held the interest rate after cutting its main interest rate in April by a bigger-than-expected 50 basis points to 8%. He also added that the bank is also taking steps to protect against possible ratings downgrades, but did not give any details about their plan.

The chaotic scenes in parliament this week has vanished the government's plans to cut fuel subsidies and invite foreign investors to support growth. The Industrial output contracted in June; growth to slow down further with on-going policy paralysis, could make the downgrade to be inevitable.

The US 10 year treasury yield is trading lower at 1.63%. The Indian 10-year bond yield fell 2 bps to end at 8.17%. The RBI is expected to purchase 900 billion rupees ($16.17 billion) worth of debt via open market operations in the remainder of the fiscal year.

Outlook: The Indian Rupee is in a range of 55 - 56 levels. Exporters still maintain covers near 56 levels as suggested and importers near 55.20-55.40 levels. The pair still stays bullish target 56.00. Chart patterns show a major breakout is expected soon in USD/INR. Breaking of 56.20 in USD/INR will be quite bullish for the pair again. (It is to be noted that rupee did not appreciate in the same manner as the dollar weakened against the Euro and pound internationally signaling extra weakness in rupee.)

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