INR appreciation beyond 64.20 unlikely before Gujarat Elections

The first USDINR lower breakout happened on 14th March 2017 on the back of UP elections along with a 2% downward move in dollar. After a week the dollar selloff reversed while INR strength continued. Importantly, this was allowed by RBI because of landscape change resulting in higher FII/FDI flows structurally. RBI had bought $11.5bn in Mar2017 post which it allowed INR appreciation and bought only $3.3bn in Apr 2017 followed by $5bn in Apr 2017. I would think RBI reduced its buying after the first half of March 2017 and reconciled with INR strength.

 

The second break (which was false) happened after RBI allowed appreciation post 2ndAug 2017 monetary policy which was short lived, in spite of the continued dollar weakness in the month. This was allowed temporarily by the RBI and then RBI bought USD 10bn in Aug 2017 to reverse the move.

 

Now, there is no local reason (comparable to UP election results) for RBI to allow further appreciation. Having crossed the 2% GDP mark substantially for intervention for the current calendar year, RBI would want to wait for Gujarat election outcome before taking a call to allow further lower move in USDINR. The government has received a lot of criticism for a stronger INR and GST implementation which has hurt domestic business, therefore government would not want incremental INR appreciation immediately. Therefore the next decision point for RBI is Gujarat elections only. 6th Dec 2017 RBI monetary policy would be a non event for currency, as rate action is unlikely.

 

Last 1 month move in other EM currencies show that INR should be around current levels while a last 6 month comparison would warrant another 0.5% INR appreciation but given India’s weaker export growth performance I don’t think RBI would take this as a reason for further appreciation immediately.

 

Therefore I would not want to incrementally sell at the current levels in spite of the momentum that the current price action shows. I would go long at 64.20 for 64.85 before 18thDec 2017, with a stop below 63.95 (weekly close). On the other hand post Gujarat elections we can witness fresh round of INR appreciation taking it towards 63.50, but that’s subjected to the outcome.