Thursday, August 31, 2017

INR update: RBI's annual report suggests that INR is fairly valued

USD Index bounced on the back of tax reform comments by Trump and better than expected GDP revisions and ADP. Tax reform expectations should ideally result in higher US yields and therefore I would carefully watch the weekly closing on US10Y (critical levels 2.16%). The uptrend in Euro is intact till 1.1750 weekly close (200 Week MA) and dips should be used as an opportunity to buy.  Today EU CPI and US PCE data would be critical.

 

RBI’s annual report states that INR is fairly valued. Given the productivity improvement and dollar weakness, INR appreciation in recent months is not a worry. RBI also states the inflation differential between India and US has come down which is a building block for an appreciating currency . Therefore lower inflation in India is a prerequisite for appreciating INR from here on. RBI also clearly states that FPI money is hot while FDI inflows lead to justified appreciation of the local currency. Therefore if large FDI flows come in then further INR appreciation can be expected. RBI also states that in India’s case a current account deficit of 2.3% of GDP is sustainable. This year we are likely to touch 1.9% which would therefore not be a worry for the RBI. RBI also thinks that a consumption led growth is not totally undesirable.

 

USDINR 1m NDF is trading 6p left while KRW and CNH have mildly depreciated since yesterday. Asian equities are also moderately in the red as Korean geopolitical tensions refuse to go away. I would use upticks to sell USDINR for a move towards 63.50 and lower in September. Buying 63.75 strike put for September end might be a great idea as it also limits losses in case of an unexpected US-NK flare up. CMP 64.04, Range 64.11-63.94.

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