INR update: USDINR headed to 67 by end September?

Since Friday morning we have two new pieces of meaningful information. The first being that the government intends to focus on fiscal discipline much more stringently than anticipated earlier (FY 20 fiscal deficit targeted at 3.3% against Thursday’s expectations of 3.4%). Second is that the government is going to raise around $10bn in the second half of the financial year through foreign currency bonds. First factor ensures that overall supply of India government bonds is going to be on the lesser side which should ensure high FPI inflows in the next 3 months into Indian Gsec markets considering the high real rates. Second factor will ensure that the domestic money markets will have $10bn of additional appetite to buy bonds plus dollar inflows of the said amount. Even if RBI sterilizes these dollar inflows then the central bank’s appetite to buy dollar from the market on a daily basis would reduce, in either case both these news are positive for bonds and INR.

Considering the above development plus the view of continued dollar weakness on account of a slowing US economy and  a dovish FED. This accompanied with the view that the trade war will ultimately result in the US pushing for a weaker greenback should ensure a strong INR for the next 3-6 months. The view on oil remains that it should remain capped at 70 with a potential to break lower given the slowing global economy.

Given the above broad factors I would think that by September end USDINR is headed to 66.85-67 levels. Meanwhile nationalized banks would continue to buy aggressively slowing the pace of INR gains. Given the high forwards, shorting USDINR looks like a very attractive trade plus not a crowded one as yet. My stop would be a daily close above 69.20 for a medium term trade. CMP 68.59, Range for the week 68.85-68.10, Range for the day 68.67-68.30.