The government and RBI have changed their stance on USDINR
frequently. From a bias towards weak INR pre March 2017 to allowing
appreciation after UP elections. Then again RBI built reserves aggressively at
64 levels and then intervened aggressively at 69 to prevent further slide in
INR. Then 69 was allowed to pass and someone said that even 80 is not bad if
other currencies also move in tandem. In all of the above RBI/government has
taken at least 3 months before it changes its stance. Given that allowing INR
depreciation beyond 69 is not even 2 weeks old, it will be some time before
aggressive intervention or policy stance would be taken to prevent further INR
losses. Currently the argument of REER adjustment is back at the forefront and
therefore USDINR has more room to go higher. Other asset classes (Bonds or
equities) have to panic before policy prevent INR slide.
Pre election year of 2008 and 2013 have seen sharp INR
depreciation on account of rising inflation and fiscal concerns. Although
inflation is not a problem this time (till now) but expectations of fiscal
slippages can take USDINR substantially higher. The fact that in the last 2
days even EURO, KRW and CNH gains has not affected INR, it seems that USDINR is
just gaining momentum. USDINR 1m NDF is trading 11p right as compared to 4p on
Friday. Oil at 77.25 (+1.5$) will ignite further trade deficit concerns. INR
should not have been bothered about Argentinean Peso and Turkish Lira but
because of our own choices we should watch them now. Medium term range is
70.40 and 71.20+. CMP 70.67, Range 70.50-70.85.
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