INR update: Doklam standoff could continue without much escalation

Trump seems to have stopped his sabre rattling from his 17 day long working vacation, because of which risk sentiments seem to have improved (USDJPY, USDKRW and Equities). US CPI came in weaker than consensus for the fifth month in a row keeping the problem of low price pressure intact in the US. Although comments from FED speakers last week suggested that they are predetermined to proceed with the balance sheet reduction in September 2017. This week we will have the FOMC and ECB minutes.

 

The reason for current standoff in China is the fact that China has asserted that India needs to withdraw all forces from the Doklam plateau before both parties can sit across a table. Otherwise both the nations have been successful in handling their border disputes through diplomatic channels in the past few decades. Without going into the details of Calcutta Convention of 1894 or the other subsequent agreements which give credibility to arguments on both sides regarding Doklam, the Chinese stance is likely to continue till the 19th Congress which happens sometime in the next 2 months. Xi has been stoking nationalistic fervour within China and therefore the hard stance is a manifestation of the same but it is unlikely that China would want this to escalate into a small border war given the threat it faces with its bigger bargaining chip, i.e., North Korea against the US. It is worth noting that in 1962 China had withdrawn unilaterally, to the north of the Mcmohan line in spite of being in a stronger position, indicating that it has no intention of controlling regions to the North of the Himalayan ridges. Since 1962 the ambiguous border has been largely respected by both the parties indicating any lack of intent to capture more territory on either side.     

 

USDINR bounced on Friday afternoon as no incremental news on Doklam was interpreted by markets as good news. The recent past risk off sentiments related to India – Pakistan or India – China has unfolded in this manner and died down as incremental news stopped pouring in. USDINR 1m NDF is trading 4.5p left as compared to being flat on Friday. Asian and Indian equities are trading substantially in the green while KRW has appreciated to below 1140 levels now. Basis other EM currencies USDINR has the potential to move towards 63.80 levels today. CMP 64.02, Range 64.08-63.84.