The Indian rupee intensified its decline in the last week of May, falling to its lowest level in 11 months on Friday. While there was reported month-end pressure from defense and oil related purchases, the global concern about the U.S. Fed tapering its asset purchase program also accentuated the rupee’s fall.
The fear of a short dollar supply by the Fed weighed on India’s vulnerable current-account deficit. The rupee was the worst performer in Asia during the month (discussed later). India’s Q1 GDP growth turned out to matched subdued expectations, but the stock market fell by 2.3%, on market concerns that the RBI may not cut rates as previously expected.
Central bank chief Duvvuri Subbarao’s comment last Thursday about upside risks to inflation and worry over the country's high current account deficit also squashed hopes for a rate cut. India's economic growth began a feeble recovery in the first quarter of 2013, but weak private consumption, capital investment and slowing public spending offered little hope for a fast rebound in coming quarters.
For the month, the rupee traded in the range of 53.66-56.76 and fell 5.15 percent. Forward premia continued to trade steadily. Two way interest was seen in the forward segment. Annualised forward premia for 1mth, 3mth and 6mth ended at 6.43%, 6.39% and 6.05% respectively.
Macro Economic Indicators
- India's economy grew 5 percent in 2012/13, its lowest rate in a decade and in line with an official estimate. Gross Domestic Product grew at 4.8 percent in the quarter ending March 31. The manufacturing sector grew an annual 2.6 percent during the quarter while farm output rose just 1.4 percent.
- India's infrastructure sector output growth slowed to 2.3 percent year-on-year in April from an upwardly revised 3.2 percent expansion in the previous month.
- India's fiscal deficit during the 2012/13 fiscal year that ended in March was 4.9 trillion rupees ($87.12 billion), or equivalent to 4.9 percent of the country's gross domestic product.
Fundamental
The coming week will see the indices struggle for direction even as it remains near psychological levels. The market will take note of the usual monthly numbers that come in from the auto and cement space. The Manufacturing and Services PMI will also be tracked.
The monsoon movement will also have an influence on the market. Though oil and gold prices have eased, the external deficit is unlikely to fall enough to nullify external funding risk for the rupee, particularly if the market's bias for pricing-in a less dovish Fed to the USD continues.
Capital account inflows following policy rate cuts have so far failed to support the INR on a sustained basis. While the policymakers pointed out that there is little space for further monetary easing, the fact that wholesale price inflation weakened substantially to 4.9% y/y in April from 6.0% the month before may allow further modest reductions in the benchmark interest rate in FY14.
India’s economic performance remains subdued and shifts in investor sentiment will continue to be reflected in the rupee’s value. The country suffers from a large current account deficit, a negative sovereign credit rating outlook (affirmed by Standard & Poor’s in May), weak government finances, political instability and subdued global demand conditions. However, a gradual improvement may be in the offing, supported by monetary easing and the government’s attempt to implement modest economic reforms. Crucial data such as CPI on June 12 and the RBI decision on interest rates on June 17 will decide further rupee momentum.
Technical
The rupee broke all its support levels last month and belied all predictions and expectations. On the weekly technical chart, the rupee is likely to touch 57.25 and may enter into uncharted territory if it breaches 57.3250, its lifetime low level.
USD/INR pair trading above its 50, 100 and 200 DMA indicates a correction can be expected in the USD/INR pair. In the near term, the rupee is likely to find support around 57.01/25. For the rupee to appreciate, it needs to close above 56.01 and show some corrective gains in two quick sessions, which it has failed to do so far.
However, the momentum still suggest rupee bearishness, which can only be negated after the currency closes above 55.50 level. Over the short to medium term 54.78 is a very crucial level for the rupee to enter into any uptrend channel.
The rupee could find strong resistance around 55.87/55.63 on its way up. The rupee could be seen in the range of 55.17 - 57.21 for the month. We will review the situation after the RBI policy review meeting on 17th June.