INR update: Limited Rupee gains likely

The US economy is showing very early and non conclusive signs of peaking out (Retail sales revision and housing data yesterday while for a couple of months the ISM data is coming off from the unsustainable 60 levels), this perhaps has led the Fed to review its overtly hawkish outlook which was visible in Powell’s comments on Friday. Nevertheless the Fed is on track for the Dec rate hike. On the other hand EU and Japan have conclusively shown data which suggests a marked slowdown in the respective economies, therefore if broad dollar weakness against DM currencies, has to gather steam, then I would think it is still some time away. On the other hand talk of US-China trade deal has ensured that USDCNH stays well below 6.95 and going by Trump’s administration’s record of ultimately solving the problems it creates (NK, Mexico, Turkey and Canada), they are likely to announce that they have struck a “magnificent and beautiful” deal with China, helping risk in EM countries.

The balance of power in the oil triad has shifted away from Saudi Arabia since the killing of the Saudi journalist in Turkey, ensuring that oil moves in the direction of US’s desire, i.e., lower. Having said that it is unlikely that oil would be allowed to sustain below 60 levels which create risks for leveraged commodity companies plus puts US alliances with oil producing countries at risk (like it happened under Obama after 2014).

On 14^th November I had expected INR to head towards 71.50 when it was at 72.14, the target has been achieved. Market seems to be taking the Dec 11^th election risk in its stride and focusing on the positives created by the fall in oil prices. FPI inflows have marginally picked up ensuring support to the Rupee. Market participants are now talking about levels of 70-71 by end of this calendar year which is resulting in exporter selling. For another fortnight Rupee should trade strong albeit for RBI buying to boost up its reserves again. USDINR 1m NDF is 5p left (4p left yesterday). The more fragile EM currencies (TRY, ZAR, BRL, RUB) have significantly appreciated  (10-15%) in the last 2 months which indicates that there could be more downside for USDINR as well. In the near term RBI buying would check the pace of Rupee appreciation while in the medium term state election results will remain a question mark. Medium term range for the Rupee now should be 71.75-70.70. For the day, CMP 71.38, Range 71.45-71.10.