Saturday, October 20, 2018 New York : London: India: Tokyo:





Weekly Report :- 09 - FEB - 2018

Rupee opened the week at 64.19 and traded in the range between 64.00 to 64.40 due to a marginal rise in USD index. The global stocks which reacted significantly on the downside also usurped the downmove in the rupee exchange rate. From the beginning of January 2018 till date, rupee had depreciated by about 0.70%. The fiscal slippage and tax on LTCG announced in the Budget shall possibly lead to a rupee depreciation of 2% or above(in absolute terms) in the current quarter. The expected range trading between 64.00 to 65.30 upto the end of March 2018 can be effectively utilized by the exporters and importers to ensure add-on value to the exposures. The huge portfolio inflows of USD 30.7 billion received in CY 2017 may not get repeated in CY 2018 and the expected lower quantum of capital inflows can take the rupee to test a low of 65.80 plus before the end of December 2018.

After remaining broadly steady from the beginning of the current financial year, the rupee started to move gradually lower on the back of internal and external factors which culminated into a downmove in the exchange rate. Rupee started to weaken post-budget on fiscal slippage. Fiscal slippage is considered to be a vital factor for the international rating agencies to defer any rating upgrade of the country.

IMF has recently predicted a global growth rate of 3.7% in 2017 much higher than the actual performance in the last 3 to 4 years. This projection is ½% higher than in 2016.As a result of the tightening stance adopted by US Fed and ECB, the bond yields are rising rapidly across the markets in the globe.  The global growth forecast from 2018 and 2019 have been revised upwards by 0.2% point to 3.9%. However inward-looking policies, geo-political tensions and political uncertainty in some countries also pose downside risks. The market expectations of the path of the US Federal Reserve policy rates have shifted up since August 2017 reflecting a possible rate hike in March 2018 and a gradual increase in the remainder of 2018 and 2019.

RBI kept their key rates unchanged in their policy meeting on Wednesday and indicated the Committee is consistent with the neutral stance of monetary policy. The policy statement estimated an inflation range of 5.1-5.6% in H1 of FY 2018-19 and 4.5-4.6% in H2 of the forthcoming financial year.

In view of the current developments in the equity and debt markets globally, it is quite possible to expect a dilution in the portfolio flows into India in CY 2018 as compared with the huge FPI inflows of USD 30.7 billion in CY 2017 which could result a downmove in the asian currencies including the rupee.

The Reserve Bank of India by virtue of having a strong forward purchase position with Banks will be in a commanding position to sell dollars in the event of any foreign fund outflows, to avoid any sharp weakness in the rupee exchange rate. It is interesting to note that in January and February 2016, the BSE sensex fell by 3115 points and the rupee had depreciated sharply by 229 paise/USD (3.47% in absolute terms) and a near repeat of such a fall in the BSE sensex in January and February 2018 may lead to a definite fall in the domestic currency but not to the extent of 3.47%(in absolute terms) in the referred period. When the BSE sensex had recovered in March 2016, most of the currency losses had been regained.

During this month till date, the benchmark BSE sensex registered a fall of 5.44% and the downtrend in the local equities is expected to end with a minimum correction of 10% over the opening level in the BSE sensex which had prevailed on 1-2-2018.

As the rupee exchange rate showed signs of its weakness over a shorter timeframe, the paying interest emerged in the swap market to take the forward dollar premia sharply higher across the maturities. The 3-month forward dollar premium was quoted at 5.01% per annum at the end of the week. Because of higher inflation expectation, the rate cut by RBI is ruled out. The short-term money market yields and long-term sovereign bond yields gradually drifted higher. The forward market differential between the 3-month and 12-month maturities has widened to about 0.59% as of now, demonstrating a sharp inversion at the far-end of the forward curve.



Weekly Report :- 02 - FEB - 2018

Rupee opened the week at 63.59 and remained firm in the first-half of the week influenced by the rapid rise in the BSE sensex and the US dollar index trading near the 3-year low of 88.25. The overvaluation in the rupee exchange rate and the need to provide export competitiveness has compelled repeated intervention from the Central Bank, disallowing any sharp rise in the rupee beyond the 63.50 level.

The contents of the economic survey released by the Government on Monday were moderately pessimistic on inflation, higher oil prices  higher current account deficit and rising local stock indices. The economic survey sufficiently signaled that the Budget may fail to evoke any positive response from the local financial markets.

We understand the forex reserves position of USD 415 billion includes the outstanding forward purchase position of over USD 33 billion. In the event of any sharp weakness in the rupee exchange rate arising out of any sudden and unforeseen events in the global markets, the Central Bank has the potential to avoid any sharp weakness in the rupee exchange rate. Hence a depreciation in the rupee beyond the 66 level during CY 2018 is hard to imagine.

Due to lower deposit growth and the higher credit growth in the third quarter of the current financial year, tighter liquidity conditions prevailed in the market. SBI has announced a hike in the interest rates of bulk deposits. Following this move, many Banks are expected to increase their depo rates marginally upto 3-year maturities by simultaneous hiking of their MCLR by 10 to 15 bps. The money market yields have inched higher and the 6-month CP rate is now quoted at 8.10% per annum with higher demand seen for issue of such instruments by corporates. We feel the rate-cutting cycle has come to an end and the key rates of the Central Bank may remain stable atleast upto the end of the current financial year.

The Union Budget announced on Thursday by the Finance Minister was mostly balanced on various aspects, except for the fiscal slippage and imposition of tax on long-term capital gains as well as taxation at 10% on equity funds after one year.The Budget indicated that the fiscal deficit for the current financial year will be close to 3.5% of GDP against the earlier projection of 3.2% of GDP. Also in the FY 2018-19, the fiscal deficit is estimated at 3.3% of GDP against the earlier projection of 3% of GDP. The fiscal slippage is a clear indication that the accommodative/neutral monetary policy stance adopted by RBI may change into a tightening stance sometime in the near future. In reaction to the news on fiscal slippage the benchmark 10-year sovereign bond yield ended the day much higher at 7.56%.

The news on fiscal slippage, the sharp rise in US T-bond yields and the bearish stock market performance shall take the rupee lower to test the 64.30 level before the middle of next week and aiming to test 64.50 level also. As the Central Bank is holding more than USD 33 billion of forward purchase position with Banks, any sharp weakness in the rupee exchange rate beyond the 64.80 level will be protected by RBI and in the event of any such rupee weakness, the exporters must utilize the opportunity to sell their medium-term receivables at a favorable exchange rate to enhance their export realization. In the current circumstances, any recovery in the rupee exchange rate is not expected beyond the 63.80 level and the trend is to gradually weaken toward 64.50 before the end of next week.

Due to sudden weakness in the rupee exchange rate and consistent strength in the euro against the dollar, the rupee exchange rate touched a low of 80.20 against the euro today. In the last 2 months from the beginning of December, the rupee had fallen by about 5% against the euro. Exporters having the short-term receivables denominated in euro against the firm export orders or the projected receivables upto 2 or 3 month maturities are recommended to sell their euro receivables targeting euro/rupee spot level of 80.50 or better to enhance the export realization, by taking advantage of the favorable currency movements and the prevailing higher euro/rupee forward premia in those maturities.

Due to weakness in the rupee exchange rate, the importers rushed in for cover in near-term maturities and the 3-month forward dollar premium drifted sharply higher to trade at 5% per annum. The 6-month forward dollar premium ended the week at 4.70%. In the event of any further weakness in the rupee exchange rate beyond the 64.50 level, the high short-term money market and sovereign bond yields shall have the potential to lift the forward dollar premia by 10 to 15 basis points across the tenor from the current levels.



Weekly Report :- 25 - JAN - 2018

The rupee opened the week a tad weaker at 63.88 due to rising global oil prices and concern about the outcome of the Budget announcement on February 1, 2018. The rising spree in the benchmark BSE sensex from the beginning of this month and the dollar’s weakness against the major currencies have kindled an upmove in the rupee and the domestic currency tested an intra-week high of 63.40 on Friday before the intervention from the Central Bank pushed the currency lower to end the day at 63.55.      

Due to higher trade deficit in the last 3 months, the need arises to maintain export competitiveness by keeping the rupee exchange rate slightly weaker. But if the capital inflows continue to maintain the same momentum as seen in the last two quarters of 2017 and in January 2018, the market will be eager to re-test the 63.25 resistance and feel that the Central Bank would actively intervene in the market to curb any rise in the rupee exchange rate beyond the above stated level.

The 10-year sovereign bond yield touched a high of 7.4562% on 10-1-2018 and after reduction in the market borrowing amount by the Government, the 10-year sovereign bond yield dipped to a low of 7.2051%. Triggered by the recent rise in US T-bond yields, the 10-year yield ended the day higher at 7.30%.

The market is concerned about the contents of Budget announcement on February 1, 2018. If the Government announces a populist Budget, it may possibly lead to expansion of revenue deficit which would increase the scope of higher GOI market borrowings in the forthcoming fiscal year. The fiscal slippage arising out of higher market borrowings if any, by the Government will have a negative impact on the currency and interest rates market. On the other hand, a favorable Budget announcement may induce a knee-jerk reaction on the upside in the market. In such an event, the market participants may be waiting and quite willing to take profits on short currency positions and to liquidate the longs in stocks.

Most asian stock indices are up anywhere from 5 to 10% since the start of the year with many at all-time highs. These markets are absolutely flying and have had seemingly one-way moves since late-December. One simply cannot rule out further upside from here, even if there are growing risks of buyer’s fatigue kicking in. The benchmark BSE sensex has climbed by over 5.86% from the beginning of January 2018 till date.

The euro’s strength was mainly driven by dollar’s sharp weakness against the major currencies specifically GBP and Japanese Yen. The European Central Bank is thinking of removing the stimulus in a gradual manner which could help the currency to remain firm against the dollar. Though the rupee strengthened against the dollar, the dollar’s weakness against the euro pushed the rupee lower to currently trade at Rs.79.10/euro. It is quite possible to expect a test of 80 spot level in the not-too-distant future. As the euro/rupee forward premium is more than 40 paise per month, the export receivables upto 3 month maturities can be targeted to be sold at an overall forward exchange rate of 80.50 or better.

The forwards remained almost steady at levels seen at the beginning of this week. The 6-month forward dollar premium ended the day at 4.54% per annum. The direction of the forwards is hard to guess at this point of time and believe the stable scenario in the interest rate differential between USD and INR shall make the forward dollar premia for various maturities upto 1 year to trade close to the prevailing levels in the next one week period from now.



Weekly Report :- 12 - JAN - 2018

Rupee opened the week at 63.32 and touched a 32-month intra-week high of 63.24 in the early hours of trading on Monday. The rupee’s rapid upmove was facilitated by the absence of any active intervention from RBI, the supply of dollars from IT companies and exporters continuing to drive the home currency higher. At this point of time, the dollar demand from importers and oil refiners are on a lower scale and the dollar supply position dominated the home currency to trade with a firmer bias, the intra-week high and low being 63.24 and 63.84 respectively.

Having received a huge portfolio and other capital inflows in the January-December 2017 period, we firmly believe the inflows in the forthcoming financial year would be much lower. The sovereign bond yields is currently trading significantly higher due to fiscal slippage and higher GOI market borrowings combined with limited room available to foreign investors for investment in sovereign and corporate bonds. As compared with the debt inflow of USD 23 billion received in CY 2017, the possible reduction in portfolio flows shall have the potential to move the rupee lower specifically in the second and third quarters of FY 2018-19.

Expectation of upcoming rate hikes by the Fed curbed the rupee’s rise beyond 63.25 at this point of time. The fall in the US T-bond yields from its recent highs and the weakening dollar overseas shall keep the rupee’s upmove intact to re-test its stiff resistance at 63.25 and 63.00 mark thereafter before seeing any recovery.

Looking from the other side,  we are now seeing that the Central Bank is intervening regularly below the 63.50 level and this factor combined with the dollar demand from oil refiners and coporates can push the rupee to  start its gradual decline to 64.00 level before the end this month . If the rupee weakens to 64.25 level, we strongly advise the exporters to sell atleast 50% or more of their medium-term receivables to reap the benefit of prevailing higher forward dollar premia in such maturities. Though we do not consider the current descent in the rupee as a reversal of its sustained upmove in the last 6 months period, a recovery to 63.25 or higher can be seen which can be set as a target level for importers to hedge their short-term payables to be initiated in the remainder of the current financial year.

The rupee appears to have become rigid on its upside despite responding to any reaction on higher inflation, a pick-up in the trade and current account deficits and a reasonably sized fiscal slippage. The stellar performance of all the asian stocks including  the benchmark BSE sensex, the second best performer in the asian region, we feel, may not repeat again in the forthcoming financial year causing  the rupee’s downmove from the current level in the forthcoming financial year.

According to market analysts, the nominal exchange rate is currently overvalued by about 15% over its real rate(REER).At some point of time, we may see a possible correction to the overvalued nominal exchange rate to maintain export competitiveness and to boost export growth. The Government is well aware that increase in export growth is imperative and necessary steps will be taken in the forthcoming financial year to include maintenance of a slightly weaker exchange rate to achieve the desired and much-needed export growth.

The outcome of Indian budget on February, 1 and the release of possibly better US economic data in the interim period prior to the March FOMC meeting can keep the rupee a shade weaker in the anticipated range between 63.40 to 64.25 with the lower end of the range to be protected by Central Bank intervention and the upper side of the above range will attract sellers all around.

The forwards significantly rose across the maturities with the 3-month forward dollar premium closing the week at a high of 4.62%. The paying interest in the swap market also uplifted the forward dollar premium on the 6-month tenor to trade at close to 4.55% per annum. Any weakness in the rupee exchange rate beyond the 63.80 level can make the forwards to drift moderately lower across the maturities in the coming weeks.

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