INR update: Trump eager to strike a deal; India's windfall fiscal gain; Risk sentiments improve

In a series of volatile comments yesterday what came out was that Trump is very eager to strike a deal with China now. On the other hand, instant Chinese denial of weekend talks indicate that China will continue to act tough till the time they get a trade deal that is favorable to them. Therefore although resolution to the trade war is still not in sight, but both US and China seem closer to a resolution than they seemed yesterday morning. Consequently we have seen Dow rising by 1% yesterday while Asian equities are in the green by around 0.5% today. USDCNH is following the  USDCNY fix continues to indicate the firm Chinese stance on the trade war. Risk sentiments remain off the table but things do not look as bad as they yesterday morning. Euro is picking the properties of JPY and EURUSD has moved lower to 1.11 as risk sentiments improved in the last 24 hours.

RBI has announced a dividend of Rs. 123,000 crore ($17bn) to be given to Indian government. Of this Rs 28k crore was given in Jan 2019 itself which was a part of last financial year for the government. Rs. 90k crore was already budgeted as dividend by the government. So the dividend positive surprise for the government is Rs. 5k crore only. The remaining Rs. 53k crore is a positive one time wind fall gain to government finances. Markets were expecting a number of around Rs. 40k crore to be given to the government over the next 3 years or so. Given this expectation vs outcome the development should support government bonds (yields are down 14bps since yesterday highs), equities and INR for the day at least.

Yesterday morning participants were limit long in USDINR and that confidence has reduced now. Given the development on the fiscal front we can see some further long unwinding in USDINR along with the mild improvement in risk sentiments. Medium term views are risky and dependent on tweets. For the day, CMP 71.80, Range 71.95-71.55.