Market Commentary: Monday, July 30, 2012

Domestic and International Highlights:

The Indian rupee opened firm at 55.27 levels against the dollar. The Intraday range for the rupee is expected between 55.00 – 55.40 levels.

The Indian rupee was seen gaining for the second day on Friday and closed at 55.33 levels against the dollar. The European Central Bank President Draghi pulled up the markets with a strong statement on the willingness by the central bank to act to prevent a Euro collapse.

The market will watch for monetary easing measures by the RBI in its policy review on the 31st of July. The majority of the market is not expecting a rate cut in the policy review of the RBI.

The reason the market is not expecting a rate cut is that inflation expectations are trending higher due to monsoon failure, as it is expected to be 22% below the normal levels. The Inflation is still sticky at 7.25% as of June and is expected to increase to 8% due to monsoon failure.

The global market seems to be back in action with positive news from the Euro Zone to tackle its debt crisis. But the Moody’s rating agency believes that the ECB commitment to preserve Euro is a necessary, but not a sufficient condition to resolve the debt. The disagreement still remains between ECB governing council members to solve the issue, as the German's central bank said it was opposed to some of the measures.

The 1.5% annualized  rise in US GDP in Q2, and some upward revisions to previous years’ data support that the Fed is unlikely to launch QE3 at policy meeting. Given that growth in the first quarter was revised up to 2.0%, from 1.9%, and that in the fourth quarter of last year it is now thought to have been 4.1%, versus 3.0% previously, it is clear that the economy is recovering at a decent pace. The US Treasury yield is down by 3 bps at 1.52% from 1.55% on Friday.

The 10 year Indian bond yields rose by 5 bps last week on account of no rate cut expectation and closed up at 8.12%. The Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased by around Rs 21,000 crores last week. Banks demand for funds was lower in the second week of the reporting fortnight leading to liquidity easing. The Liquidity is likely to ease further in the coming weeks on reducing demand for funds from the system given the slow pace of economic activity.

Outlook: Importers who have missed the levels of 55 levels may still look at covering close to 55 levels or below . 55 remains crucial technical support for rupee. Exporters had been recommended to cover above 56 last week as per costing and should wait for further covers near 56 levels again.

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