Friday, December 15, 2017 New York : London: India: Tokyo:




Weekly Report :- 10-Nov-2017

The rupee opened the week a lot firmer at 64.65 and the intervention from the Central Bank supported the rupee to trade in a narrow range between 64.75 and 65.15 with a neutral bias. The rupee touched an intra-day low of 65.1850 today before ending the week at 65.17. As the rupee exchange rate has now settled to trade in a narrow range of 40 to 50 paise/USD, the importers and exporters are in a dilemma to hedge or not to hedge their exposures to benefit from exchange rate movements on both the sides of the above range restricted to a timeframe of 15 days or so from now. In the last 5 financial years, including the current financial year upto date, the average rupee depreciation against the dollar was close to 3.75% per annum. The last five year timeframe includes the FY 2013-14, where the rupee had depreciated by a whopping 10.50% against the dollar due to much higher current account deficit in that period and the needed correction to the overvalued exchange rate in real terms. In the last 18 months timeframe, the rupee showed a good two-way movement with an upward bias. Investments from domestic investors and mutual funds in the local stocks outweighed the foreign equity flows giving scope to a significant rise in the local stock indices and drum-beating sentiment to the rupee. Though one cannot view the current move as reversal of a secular downtrend in the domestic currency, the encouraging macroeconomic factors and comfortable external position of the country places India as one of the fastest growing emerging market in asia and a favorable investment destination.

The huge rise of 5647 points(24.95% gain) combined with the FPI equity inflow of over USD 5.60 billion had resulted in a significant rupee appreciation of 4.78% against the dollar in the January to October 2017 period. The net FPI debt inflow was huge at over USD 22.5 billion which supported the rupee to register a sharper appreciation. In the recent months, we have observed a clear disconnection between the foreign equity inflows and the performance in the local stock indices, the reason being the outweighing of domestic stock indices versus the foreign fund equity flows.

We recommend the importers to hedge their payables upto end-February maturities at an average spot target rate of 64.70/80. The rise in the global oil prices being witnessed now and the gradual ascent in US dollar index suggests hedging of payables at the indicated target rates.

In the absence of any fresh factors to move the rupee exchange rate one way or the other, the two-way movement in the rupee within the anticipated range of 64.60 to 65.30 is being seen. The rupee exchange rate moving in the anticipated range provide better opportunities for importers and exporters to hedge their forex exposures appropriately to accomplish the internal benchmarks set by the Management. With the geo-political tensions gradually dimming, selling of forward dollars for medium-term maturities seems to be a better option at this point of time as the forward dollar premium clearly overstates the expected level of depreciation over the corresponding period for medium-term maturities.

Indian companies have raised about USD 8 billion from IPOs in India so far in what is set to be a record year. The huge inflows from FPI/FDI and IPOs helped gradual ascent in the rupee exchange rate from 68.00 level at the beginning of the calendar year to the current level of 65.15. Rupee touched a high of 63.55 on 3-8-17 and determined intervention from the Central Bank pushed the rupee to trade a little lower above 64.30 in the period thereafter.

RBI FX intervention is September was at USD 1.26 billion with buying of USD 3.79 billion and selling of USD 2.53 billion. The two-way intervention stance from RBI is providing comfort to the market to believe that the weakness of the domestic currency, if any due to adverse external events can be well managed by the Central Bank without much currency volatility in the future periods. In the April-September 2017 period, the net FDI inflow was at USD 20.79 billion which is almost the same as seen in the corresponding period previous year. However, higher FPI inflows in the first-half of the current financial year led to total foreign investment to rise to USD 35.46 billion from USD 28.94 billion previously. All these developments on the external front have helped the domestic currency to maintain a stable environment. In the remainder of the current financial year, we do not expect any depreciation in the rupee exchange rate by more than 1 to 2% from the current spot level. Hence, at this point of time, one can safely assume that the hedge or no-hedge position may lead to marginal exchange rate gains or losses due to adoption of above stance by the corporates against the medium-term foreign exchange exposures.

The forward curve is currently demonstrating a flattening pattern with the forward dollar premia for 1-month to 1-year maturities quoted at 4.5 to 4.35% per annum at the near-end to far-end maturities. The paying interest from PSU Banks arising out of Central Bank intervention in the far-forward maturities (beyond 3 months) lifted the 6-month forward dollar premium to end the week higher at 4.53% per annum.


Weekly Report :- 03-Nov-2017

Rupee opened the week a lot firmer at 64.88 due to unabated rise in the local stock indices in the recent weeks. On Thursday, rupee tested an intra-day high of 64.5050 and the Central Bank through their intervention pushed the rupee a little lower to trade in the vicinity of 64.60 at the end of the week. The currency volatility in the week was limited to 40 paise/USD and the unhedged status for both the importers and exporters during the period had little impact of hedge effectiveness.

Foreign investment in debt markets soared this year. The FPI debt inflows exceeded USD 22.8 billion in CY 2017 till date against the net debt outflow of USD 6.32 billion in CY 2016. The rupee is rallying and the domestic bonds are in demand offering some of the best inflation-adjusted return in Asia. The FPI bond inflows picked up in the last 6 months as inflation is at its lowest in 5 years. Economic growth is picking up and the current account deficit at less than 1.4% of GDP in the current financial year. In the last 52 weeks period, the benchmark 10-year sovereign bond yield varied between 6.18 to 6.99% and currently trading a lot higher at 6.86%. The RBI is reluctant to raise foreign debt limits to avoid the risk of sudden outflows later, potentially limiting further gains in the rupee.

The supply and demand of dollars in the market is almost matching to maintain a stable scenario in the rupee exchange rate. In the current circumstances, the hedging of payables by importers upto next 3 months maturities shall prove to be a better option. Rupee’s gains were restricted by dollar demand from importers and Banks at lower levels. In view of the rupee stability being seen from the beginning of this calendar year, the importers may think of executing low-risk, low-reward option transactions restricting to a lower percentage of the trade credit portfolio to aim for reduction in the financing cost on the overall portfolio.

From the beginning of January 2017 till end-October, rupee had appreciated by 4.68% fuelled by FPI, FDI and IPO-related inflows into the market. In the remainder of the current financial year, we do not expect a rupee depreciation of more than 2% from the prevailing spot level of 64.60, capping the rupee’s downside at 66.00-66.30. On seeing any bout of rupee weakness in the interim period, exporters are well advised to sell their medium-term receivables to derive the additional benefit of higher forward dollar premium available in the market in those maturities. Rupee’s weakness beyond 65.30 seems to be clearly unsustainable and the domestic currency’s gains were driven by favorable macroeconomic indicators and the comfortable external position of the country. The sharp recovery in the exchange rate from the low of 65.89 on 28-9-17 signals the inherent strength in the domestic currency fuelled by huge capital inflows and favorable internal indicators.

We have observed a change in intervention stance from RBI by way of their intervention in the market on both the sides of 65.00 pivot level within the overall range between 64.30 to 65.80. The sharp appreciation of the forward rupee specifically in 6-month maturities may influence the approach being followed by corporates in adopting to dynamic hedging strategies by keeping about 10% of the forex exposures unhedged and waiting for an opportune time to cover the unhedged positions to derive exchange rate gains for the companies.

In October 2017, the BSE sensex soared by 1929 points(around 6% gain) whereas the FPI equity inflow was USD 469 million. This clearly highlights that buying interest from domestic investors outweigh the equity investments from foreign investors at this point of time. The sharp and sustained rise in investments from domestic investors seems to be the new market theme in the recent months. The investors showing sustained buying interest in local stocks and subscribing to new IPOs highlights the change in the investment stance by those class of investors.

The broad stability in the exchange rate observed in the last 18 months or so clearly indicates the improving sentiment of foreign investors in the domestic economy highlighted by encouraging macroeconomic indicators and comfortable external position of the country placing India as one of the fastest growing emerging markets in asia and a favorable investment destination.

With the rupee exchange rate gradually gaining strength toward the 64.50 stiff resistance level, the intervention-related paying interest in the swap market has picked up momentum in far forwards due to shifting of spot dollar purchases and rollover of the maturing forward contracts by the Central Bank to various forward maturities. The 6-month forward dollar premium spiked to a high of 4.52% per annum at the end of the week from about 4.23% per annum almost a week ago. 


Weekly Report :- 27-Oct-2017

Rupee opened the week at 65.07 and the exchange rate maintained its stable range between 64.90-65.15 during the period. We are likely to witness a period of stability in the exchange rate unless any sudden adverse external developments knocks the rupee lower. Helped by capital inflows into FPI debt, FDI and IPO markets, rupee retained its firm undertone supported by strong domestic equity market. The fears of RBI intervention at close to 64.70 level and the expectation that Donald Trump will choose a more hawkish Fed Chief could halt the rupee’s rise against the dollar beyond 64.70-80 level. The fall in India’s trade deficit lifted the domestic currency’s upward bias but dollar demand from PSU Banks probably on behalf of the Central regulator curtailed rupee’s strength at the above stated resistance.

Markets fear for active Central Bank intervention near the 64.70 level and hence any rise in the rupee exchange rate beyond that level may not materialize in the short-term. There are no new factors emerging in the market to move the rupee sharply on either side of the 65.00 pivot level. The strong resistance for the rupee at 64 mark which had prevailed for more than 3 to 4 months earlier has now shifted its base to 64.70 with good support coming in at 65.80 to 66.00. Any signs of rupee weakness above the 65.50 level should be utilized by the exporters to sell a good portion of their medium-term receivables, as any sharp weakness beyond the 66.00 level is not expected, barring any sudden and surprising external developments to shake out the market’s stability.

Till the middle of next month, we anticipate the currency to trade in the range between 64.70 to 65.50 and within the above suggested range, the importers and exporters can hedge their exposures for short-term maturities on the payables side and medium-term maturities on the receivables side to derive lower import financing cost and enhanced export realization for importers and exporters respectively.

The rupee was in an appreciation mode over the past 18 months or so and there is a good possibility of the home currency to depreciate by 2 to 3% in the current financial year over the translation rate of 64.84 as of 31-3-2017. In view of the above expectation, a corporate is required to alter the strategies on a rolling basis depending upon the currency outlook and forecast from time to time. In the current financial year upto date, the whopping FPI inflows of USD 27.80 billion provided an ample support to the rupee exchange rate to stay broadly stable with weakness on an occasional basis, as a result of temporary adverse developments witnessed in the global financial markets. The geo-political tensions posed concern at irregular intervals as to the direction of the major currencies and emerging market currencies against the dollar.

Rupee after registering a low of 65.89 on 28-9-2017 retreated more than two-thirds of its losses to currently trade in the 65.00-65.10 zone. The rupee’s appreciation of about 4.70% from January 2017 till date was attributed to local stock market gains and huge FPI inflows raising the forex reserves to over the USD 400 billion mark. The comfortable current account deficit and India’s macroeconomic indicators signal broad stability in the local financial markets.

The dollar index and the US T-bond yields are expected to rise further from the current levels on emergence of positive news from the US markets which should keep the rupee in a downward bias against the dollar but not exceeding 65.50 in a timeframe of 2 to 3 weeks from now, while the resistance at 64.60-70 shall hold on fears of active Central Bank’s intervention.

As a result of the rupee trading in the vicinity of 65.00-65.10 levels, the paying interest from importers has increased and the 6-month forward dollar premium ended the week at 4.40% per annum. We feel the paying interest in far forwards from the PSU Banks on behalf of RBI could have influenced the paying interest in the swap market.


Weekly Report :- 18-Oct-2017

Rupee opened the truncated week a lot firmer at 64.75 and today it tested a low of 65.1575 before ending the week at 65.04. The FPI debt outflows of over USD 1.9 billion in this month combined with exporter-selling influenced the rupee to test higher levels. In a timeframe of 2 weeks, the rupee registered a sharp retracement from 65.89 on September 28 to a high of 64.68 on 16-10-17. We expect to see more volatile movements in the exchange rate in the boxed range between 64.70 to 66.00 before the end of December 2017.

India’s exports recorded a robust growth of 25.67% to USD 28.61 billion in September, while imports also rose by 18.09% to USD 37.5 billion in September and the trade deficit narrowed to 7-month low of USD 8.98 billion in September 2017 from USD 9.07 billion in September 2016. The contraction in trade deficit if it is repeated in the coming months can bring down the current account deficit to about 1.5% of GDP, as per earlier market expectations. The rupee registered good support from the favorable trade data.

The expectation of December Fed rate hike encouraged by the robust US economic data has significantly increased and the dollar index is gradually moving higher along with the US T-bond yields. The rapid increase in US T-bond yields backed by expectation of Fed rate hikes in December and March 2018 could lead to debt outflows from the emerging markets including India. In such an event, the possibility of rupee’s weakness to 66.00 level is almost certain. The report that US President Donald Trump was favoring a policy hawk as the next head of the Federal Reserve implies that it would be positive for the dollar rather than negative for asian currencies per se. A hawkish Fed could prompt investors to shift into US assets on the prospects of better yields triggering capital outflows from emerging market currencies. Such outflows could create a significant fall in asian currencies including the rupee. The BSE sensex fell by 1230 points in August and September and the fall was fully neutralized by the gain of 1301 points in October till date. The FPI equity outflow of USD 4.4 billion from August 2017 till date had limited impact on the rupee exchange rate.

Barring any sudden and unexpected global events as witnessed by us in 2008(global economic crisis) 2011-12(eurozone crisis) and 2013-14(higher and burgeoning current account deficit),the two-way exchange rate movement is generally restricted to 100 paise to 200 paise/USD either on the weaker side or on the firmer side of the rupee exchange rate depending upon the changing circumstances in the market from time to time.

A corporate risk manager is required to tentatively forecast the exchange rate range on a quarter to quarter basis to evolve dynamic hedging strategies and determine application of appropriate hedging tools to finetune the exposure management strategies to achieve risk management objectives set by the management of the companies.

The temporary uncertainty on the direction of exchange rates due to various internal and external factors  led to two-way exchange rate movements limited to atleast 75 to 100 paise/USD, which we can expect to see on more occasions in the current accounting quarter. The two-way exchange rate movement provides the potential opportunities for importers and exporters to hedge their exposures at an opportune time to benefit from enhanced export realization for the exporters and reduced the financing cost for importers against the underlying imports.

The 3-month forward dollar premium is now prevailing at 70 paise/USD(4.30% per annum) and the importers are advised to target a spot rate of 64.80 or better to hedge their 3-month liabilities.

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