Buyers credit scam started the slide in Rupee; Merchant buying is coming off now

• -        The above chart shows the net purchases of FX by Indian merchants from banks on a daily basis in USD mn, 20 day moving average (source RBI website).
• -        The long run average for this is USD 256 mn (since 2010). Since the exports and imports in 2011 were virtually at the current levels, there is no need to adjust this level to current date for comparison purposes.
• -        This doesn’t include interbank purchase or sale.
• -        The data clearly shows that net purchase of merchants increased as soon as the buyers credit scam broke out (Feb 2018) and buyers credit availability became scares. Subsequently RBI disallowed buyers credit altogether.
• -        This move up in USDINR further accentuated the increasing trade deficit fears. The trade deficit fears gained momentum because of increasing oil prices.
• -        The buying by merchants seems to have peaked in May 2017 but has far from normalized even now. Although the per day average is coming down but it is resulting in incremental buying of $150 mn per day above the long run average of $256 bn per day.
• -        Therefore even a decreasing average is leading to higher USDINR as it continues to put demand pressure on the pair.
• -        The below data suggests that merchants have net bought ~$35 bn extra in the last 7 months.
• -        This data is till Aug 2018 and it indicates that the average per day of buying is moving lower. September data when available should corroborate the same
• -        Going by this decreasing trend, if external factors (like dollar weakness) supports then USDINR might move lower towards 73 before pre election uncertainty kicks in.