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Weekly Report :- 19 - 10 - 2018

Rupee opened the week at 73.79 with the intra-week high and low of 73.29 and 74.06. The rupee ended the day a bit firmer at 73.33. The FPI outflows in October till date was over USD 4.5 billion which pressurized the rupee to trade lower in the first-half of the week. The equity outflows in October till date were higher at about USD 3 billion corresponding to the fall in BSE sensex by 5.28% indicating the quantum of stocks sold by foreign investors is much higher than the stock purchases by domestic investors.

We strongly feel the Government is mulling with the idea of issuing NRI bonds upto an amount of USD 50 billion for 3 to 5 years maturities, as the USD swap yield curve is flat. The Government may prefer to issue the 5-year USD fixed rate NRI bond. The Government is also keen on moderating non-essential import items like gold, electronics and other luxury goods in order to reduce the non-oil import bill. If the global oil prices are hovering in the USD 75-85/barrel, the concerns on the oil front will be lower to trigger a moderate recovery in the rupee exchange rate.

India’s trade deficit shrunk to a 5-month low of USD 13.98 billion for the month of September compared to USD 17.39 billion in August. For the 6-month period between April and September 2018, the trade deficit came in at USD 94.32 billion with exports up by 12.5% and imports witnessing a rise of 16.2%. The Government in September hiked the customs duty on 19 items to check the rising current account deficit which comes as a relief to the Government to face the external account imbalances.

From the beginning of January 2018 till date, the 10-year sovereign bond yield rose higher by 60 bps and notably the yield rise of 56 basis points was between the shorter timeframe of 42 days from 2-8-18(7.6775%) and 12-9-18(8.2331%). The OMO of the Central Bank helped to ease the yields from much higher levels. The 10-year sovereign bond yield is now trading at 7.92%.

The rupee touched a low of 73.29 today helped by higher emerging market currencies against the dollar. The importers are not comfortable to hedge their medium-term exposures at the spot level of 74.00 as the forward dollar premium upto 6 months are ruling high. The forward dollar premia over the 74.00 level for 3 to 6 months maturities seems to be unfavorable as compared with the rupee’s depreciation expected in the corresponding period.

 From the beginning of January 2018 till date, the rupee had depreciated by 14.69%, the worst performing currency in the asian region. The sharp depreciation was due to significant shift in global fund outflows from emerging markets like India to the US in the past few months. While the dollar’s appreciation against major currencies was close to 9%, the rupee’s depreciation was much more than 14.60% led primarily by a hawkish US Fed policy and strong macro data from the US. The fundamentals of an EM-like India have been relatively better.The markets are now realizing that the rupee’s depreciation was overdone and hence a technical correction can be expected before the end of the month to take the rupee toward 72.50 level. In the interim period if the Government announces the stern measures to support the rupee, the pace of recovery in the domestic currency will be speedier toward 70-71 level. Our forecast upto the end of the current financial year will be in the range between 70.00 to 75.00/USD with an appreciating bias on more occasions in the referred period.

It now seems that stability in the global oil prices may bring a relief to the rupee exchange rate or atleast cap the rupee’s fall beyond the 74.00. Even though no concrete measures has not yet been announced by the Government to contain the fall in the rupee, the market feels that the rupee’s weakness is clearly overdone and the offshore markets are also mostly stable on the rupee.

Due to reasonable stability in the rupee exchange rate, the demand and supply of dollars in the market is mostly neutralized keeping the rupee to trade in the boxed range between 73.30-73.90. The 6-month forward dollar premium drifted lower to 4.39% per annum and the 12-month forward dollar premium ended the week at 4.32% per annum. If the US rate hikes materialize in 2018 and 2019(total of 4 hikes) as per the Fed’s dotplot, one can expect the forward dollar premium for 6 month tenor can drift lower to 4% per annum in the next 2 months timeframe.



Weekly Report :- 12 - 10 - 2018

Rupee opened the week at 73.94 and touched an intra-week all-time low of 74.47 on Thursday due to dollar’s strength against the emerging market currencies and huge portfolio outflows of about USD 11.8 billion from the market from the beginning of January till date. The fall in the BSE sensex by 6.14% from 1-10-18 to 11-10-18 triggered a sharp fall in the rupee exchange rate. The measures announced by the Government in the early part of the week were insufficient to increase the dollar inflows in the short-term and hence the rupee continued its downfall till Thursday this week.

As of now, there are no new factors in the horizon to reverse the rupee’s trend, unless the Government announces stern measures to limit the rupee’s fall and contain the imported inflation. In the Q1 and Q2 of the current financial year, the rupee had depreciated by 5.44% and 5.79% in absolute terms respectively. In the first week of Q3 of FY 2018-19, the rupee has already depreciated by 1.52% in less than a fortnight. The rapid fall in the rupee exchange rate posed concerns to the importers and huge translation losses for the foreign currency loan borrowers. A surprise announcement from the Government is the only solution as of now, to contain the rupee’s speedier fall.

 Diminishing demand for emerging market assets, thanks to US monetary policy tightening has triggered a fall of 15.26% in the rupee against the dollar. Domestic currency has been hit by rising oil import bill and worries over a debt-burdened financial system. The remittances from expatriate Indians is set to increase in the coming years, which will allow India without having to rely heavily on other more viable types of inflows. Indian companies went on a borrowing spree abroad in the past few years when the local currency was stronger. The rupee touched all-time lows this year and has lost more than 15.26% this year, amid a sell-off in emerging market assets.

As the rupee depreciated by more than 15% from the beginning of January 2018 till date, the Government is considering tapping Indians living overseas to lure foreign exchange flows and prop-up a sagging rupee. An announcement regarding the method may come as early as this month according to some unidentified sources from the Government. The risk of current account deficit left the rupee vulnerable to the rout in emerging markets amid surging oil prices, trade tensions and rising interest rates. The NRI bond scheme if it is implemented has the potential to change the rupee’s trajectory. The policy makers are quite serious to make sure that the current situation does not get out of hand.

From the beginning of October till date, the BSE sensex fell by a whopping 4.12% and the FPI equity outflows were more than USD 2.2 billion in the corresponding period. The equity outflows registered the highest fall in October against the net FPI equity outflow of USD 1.74 billion in the April-September period. The portfolio outflows were more than USD 11.7 billion during the period January 2018 till date which exerted pressure on the rupee to continue its gradual descent.

 From the beginning of May 2018, all the internal and external factors turned adverse against the rupee, the combined effect of which led to a steep depreciation in the rupee exchange rate. The unidirectional downtrend in the rupee continued without any recovery in the period between April 2018 till date. We understand the Government is mulling with the proposal for issue of NRI bonds, the terms of which are being discussed. The sooner they announce that much will be better to avoid the free-fall in the currency.

The unhedged short-term payables needs to be hedged after watching the market conditions in the next one fortnight. The 6-month forward dollar premium is now quoted at 4.40%. The 1-year USD Libor is currently quoted at 3.03% against the 1-year T-bill rate of close to 7.60% indicating a forward differential of 4.57%. The 1-year forward dollar premium is being quoted at 4.35% mostly reflecting the interest rate differential between USD and INR interest rates for the 1-year maturity. The speedier rate hikes by Fed shall contract the differential between the USD and INR rates for 1 year tenor, leading to a drift in the forward dollar premium to 4% per annum or lower.

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