Flip Flop of India Rupee

Indian rupee has witnessed a freefall during the last few weeks, blinking a one-year low at 56.82 against its US counterpart. There are a couple of things that have pushed the Indian unit below its par.

Iranian Gas
The main and primary reason is ambiguity over Iranian Gas Contracts with Indian Firms. Iran has been working on a new contract arrangement to attract foreign investors to its hydrocarbon sector. However, Indian local firms are doubtful because Iran faces sanctions due to its nuclear program. Iran has offered the first pact globally to an Indian groups comprising of ONGC, IOC and OIL, which has won a bid for a block in 2002 from National Iranian Oil Co.

After India and the US signed the civil nuclear deal in 2008, several Iran-related Indian projects have been either rejected or put on hold as oil importers are facing several issues regarding payments for same. In April-December 2012, India imported 9.69 million tons (mt) of crude oil from Iran valued at Rs 24,814 cr. After sanctions, crude oil supplied to India has dropped from second to seventh. India is the world’s fourth largest oil importer and a major customer for Iran’s 1.7 Million barrels per day. India needs to import fuel given the limited nature of domestic energy sources. India’s dependence on imports is as high as 80% for crude and 25% for natural gas.

The Rupee
The Indian Rupee has plummeted from 53.63 to 56.82 within span of 30 days. Uncertainty over same has forced the central bank and Government to take immediate steps as foreign investors, Banks and Oil Importers are buying US counterparts, staking short positions in the Indian unit within past few weeks. There has been news that the RBI has intervened in the Forex market, bringing the Rupee to the 56.75 level, which has put a halt to the momentum. In recent comments from RBI Governor, DV Subbarao, mention that they are not targeting any particular forex rates and their action and inaction will be consistent with central bank policy. Their main intention is to manage volatility and to prevent disruption. He admitted that Current account deficit has been major concern for economic environment. Governor D Subbarao said that there is no fears of stagflation in the economy and asserted that the central bank is sensitive to growth concerns but not at the cost of higher inflation. On the other hand, Finance minister of India has been trying to make hawkish comments and further stated that they will take aggressive steps to curb Indian gold Import. They will curtail all trading related to gold imports and allow only for usage purpose. Today, they promoted and clarified new norms on Banking license for new aspirants. Hence, it is very clear that the government and central bank won’t allow the Indian rupee to slip below the 57 mark, in a bid to bring it near the 55.50-56 level. If the Indian unit falls below 57, there will be much pressure on importers, especially oil and gold importers.

Bonds
Indian bonds rose, halting a five-day decline, after the central bank said it will resume debt purchases for the first time in a month to boost funds in the financial system. The Reserve Bank of India will buy as much as 70 billion rupees ($1.2 billion) of government notes on June 7. The monetary authority last bought 96.6 billion rupees of bonds on May 7 to ease a cash shortage. As per sources, the RBI may purchase 750 billion rupees of debt in the first half of the fiscal year that started April 1.

On the technical front, we expect USD/INR to find its first support at 56.38, which was the previous resistance for during the last year. Any break and fall below same will lead the pair to find its second and third support at 56.20 and 56. On the other hand, the pair may find its resistance at an all-time high of 57.33 if it breaks above 57, which will negate above view.