INR update: Receding local concerns and positive global environment

The improvement in Trump’s presidential career has come on the back of him listening to his team. Basis this I would think, that if Mnuchin backs Powell then Powell should be the next FED chair which is fairly dovish or a continuation of existing FED policies. US data (Empire state manufacturing survey) continues to show signs of robust economic activity which should help the FED to continue normalizing policy (rates and balance sheet) irrespective of sub target inflation. Therefore I would continue to think that US yields have further scope of moving higher as they price more of the FED projected rate hikes in the curve itself.

 

The next major global event is the ECB on the 26th October. The recent fall in Retail sales would make the ECB circumspect about giving an end date to the asset purchase program. On the other hand they would use the positive global and EU economic environment to ensure that they take an incremental step towards tapering. Thus the approach should be similar to the other successful DM central bank, i.e., FED, which is to keep taking incremental steps towards policy normalization without scaring the markets with a hawkish overtone.

 

In India the fear of fiscal deficit increase and higher current account deficit has somewhat receded though not conclusively. Basis the recent trade data along with CPI and less reliable IIP it seems that immediately a case for immediate weakening of Indian macros is not warranted. On the other hand comments from the government showed that there is caution and fiscal purses would not be loosened immediately.

 

USDINR 1m NDF is trading 1p left which is in line with improvement in Indian macro expectations improving. Nifty which a week back was looking like heading towards 9600 is now trading at highs although majorly due to domestic buying. EM currencies have mildly depreciated since yesterday which is reflected in the price of 64.90 up from yesterday’s 64.75. Exporters who have recently seen sub 64 levels, are now more likely to sell at upticks while importers continue to gain in confidence. CMP 64.90, Range 64.95-64.80.