Indian rupee to US dollar traded within a tight range of 60:20 and 60:32 levels on spot and closed around 60:22/24 levels. Sporadic demand from FIIs kept the pair supported above 60:20 but some exporters offers did not allow for a run away trend in the Greenback. Economic data flow was mixed as the headline whole as well as retail inflation ticked higher but core came in lower. Domestic equities were under selling pressure due to risk off in the Asian financial markets.
Over the past few weeks, the central bank has been an active buyer of the foreign currency, lapping up close to USD 10 billion. At the same time, two other sources of the foreign currency has more or less been turned off viz., the inflows in the short-term debt and the inflows that occur going into national elections into the country.
RBI has disallowed FIIs from buying short term government debt and there is little space of investment in the commercial papers of corporates as limits are almost fully exhausted. Therefore, now RBI has got only the inflows into the equity markets to absorb. It is a fact that trends and momentum become self-fulfilling and attract hoards of money who are looking to ride the momentum boat, but the question that remains, is how much more can just “hope” drive equity markets, when even a stable government would need a long time to put Indian economy on sustainable growth path and also tackle a number of fiscal, savings-investment deficit, internal and external challenges.
Economy has never been a strength of the Indian rupee and the two major economic releases underscored that point. Industrial production contracted during month of February and exports growth too registered a de-growth over the month of March. We have argued many times in the past, industrial activity remains anaemic and a 2% positive or negative is not going into change that trend. At the same time, we had explained how weak remains the quality of our external balances, evidenced from the sharp down trend in the export growth. Import growth remains artificially suppressed due to the heavy handed curbs on official forms of bullion imports. Therefore, unless India can address the core issues of the imbalance, the improvement is purely optical and good for political mileage than for serious economic or financial gains.
Global markets have shown risk-off moves with both credit as well as equity markets having sold-off from their recent highs. We continue to expect muddle through economic performance from the major economies around the globe, as few quarters of economic surprises will be weighed down by couple of quarters of anaemic growth. Hence, we need to keep a watch on the future direction of quantitative easing, as US is pretty much on the path to unwind its monetary stimulus. In case, ECB or BOJ do not commit to further money printing exercises soon (which we think is of little benefit to their long term economic growth, but nevertheless will be used because it provides sometime of optical benefits and is politically palliative), financial markets may see the volatility increase.
Over the next week, we expect more to and fro moves from the pair. A broader range of 59.50/80 and 60.60/80 can be seen. Hence, traders can find quite a number of range trading opportunities in all the four currencies, viz. Euro, GBP, Yen and US Dollar, against the local unit.
By Anindya Banerjee, Analyst, Kotak Securities