Medium term view
INR started its current slide in Feb 2018. If we compare the
period of Feb-Sep for 2017 and 2018, then we observe that $27 bn of additional
demand has come from the deterioration in trade deficit. As per RBI, investment
flows have resulted in lesser inflows of $35bn in the same period. While in
2017 RBI net bought $52 bn this time they were net sellers of ~$46 bn. Assuming
little changes in other components of BOP, this results in a net additional
supply of $30 bn from the RBI which would be the net change in hedge positions
of importers and exporters.
With a monthly trade and services volume of $70 bn a $30bn
change in positioning over a period of 8 months would have resulted in complete
internalizing of the weak INR view. On the other hand INR seems to be fairly
valued at 73 levels as per 2012 base REER (36 currencies). Plus currently the
government and RBI seem to be very vary of further INR depreciation.
Given the fact that in the last 6 months INR has depreciated higher than
other EM currencies we can see a period of consolidation in INR which can take
the pair towards 73-73.25 by October end, provided dollar remains soft ahead of
the midterm elections in the US. Having said that any appreciation of the Rupee
will be bought into as the country steps into a period of political uncertainty
with state elections in December and central elections in May 2019.
For the day
Today 1m NDF is trading 6.5p right as compared to 9p right
yesterday while EM currencies have moderately appreciated since yesterday.
Equity markets are in the positive territory as Saudi stocks closed 4% higher
yesterday as Trump sent his secretary of state to discuss the brewing crisis
between the two allies. Crude is trading softer at 81 levels while yesterday
the FPI outflows seem to have abated. Given the medium term view and the
factors today INR can appreciate by 30p today. CMP 73.86, Range 73.95-73.65.
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