The Indian rupee remained largely rangebound for most part of the week in line with our previous newsletter’s outlook.
However, the unexpected turn of geo-political events towards the end of the trading week saw Rupee also coming under pressure in line with our global financial markets. The first four trading days of the week saw Rupee gyrating between 59.91 – 60.27 range but on Friday it slipped to 60.45 in the early deals. However, end of the session saw Rupee recovering its lost ground and global markets also stabilised as search for safe havens abated. Domestic economic data released last week have been encouraging. Consumer prices eased to their lowest since figures were first published in January 2012, while other data this month showed improving manufacturing activity and rising exports. For the week, the rupee traded in the range of 59.91-60.45 levels and depreciated 0.57%. This was rupee’s biggest weekly loss since mid-June when emerging markets had reeled on worries about the prospect of civil war in Iraq. But the currency pared losses as Indian shares rose for a fourth straight session on Friday. Rupee ended the week at 60.28 compared to its opening of 59.94. 1mth, 3mth, 6mth and 12 mth annualized forward premia closed at 8.16%, 8.36%, 8.41% and 8.15% compared to its opening at 8.19%, 8.41%, 8.53% and 8.38% respectively.
Earlier in the week, China released its Q2 GDP data. The economy grew at a slightly faster pace — increasing 7.5 percent compared with the same quarter a year ago and up from 7.4 percent in the first quarter beating forecasts for a 7.4 percent increase. June industrial production climbed 9.2 percent on the year while retail sales gained an annual 12.4 percent, in line with estimates.
Indian Stock Market
Benchmark share indices rebounded in the week to July 18 after the Reserve Bank of India exempted the mandatory reserve requirements on funds raised through bonds for extending credit to housing and infrastructure sectors. Further, hopes of cut in key policy rates amid easing inflation also aided sentiment. Investor sentiments also improved after a major IT company reported better than expected earnings numbers in the June quarter. However, the week was marred by emergence of geopolitical tensions. But after an initial shock at the start of trading, markets pared their earlier losses as the 30-share Sensex ended up 617 points or 2.5% at 25,642 and the 50-share Nifty ended up 204 points or 2.7% at 7,664. In the broader market, the BSE Mid-cap gained 1.3% while the Small-cap index surged 5.1% outperforming the benchmark indices. During the week market witnessed FII inflows to the tune of $539.87 million in equities and $329.84 million in debt, making it total net inflows of $1.08 billion.
Macro Economic Indicators
- India's foreign exchange reserves rose to $317.04 billion as of July 11 compared with $316.39 billion in the week earlier.
- India’s trade deficit for June rose marginally to $11.76 billion from $11.23 billion in May.
- Exports showed double digit growth for the third month in a row YoY, up 10.22 percent to $26.48 billion.
- Imports were up by 8.33 percent YoY at $38.24 billion after 12 consecutive months of contraction.
Outlook
Fundamental
Global factors are likely to be the key drivers for the rupee next week and any escalation of tension could offset signs of improving economic fundamentals at home. Though the markets have successfully shaken off other geopolitical events this year, such as Russia's annexation of Crimea, and that the impact of the latest developments may not be long lasting however, geopolitical developments have a way of taking market by surprise and is not helpful for the investment climate. Hence, one needs to remain cautious. On the domestic fundamental front, a combination of a subdued trade balance and supportive capital flows has led to accretion of US$12bn in RBI’s FX reserves during 1QFY15 and has also allowed RBI to reduce its outstanding short forward position by US$19.1bn (US$11.4bn from US$32bn earlier) as per latest available data. RBI is likely to aim at fully offsetting its short forward position and hence its intervention in the forex spot market may continue. We expect Rupee to continue to trade in a range as any significant appreciation in Rupee will see RBI stepping in to buid up its reserves to 1) prevent appreciation in REER and 2) further improve the import cover, which is currently at eight months. Moreover the customary month-end demand will also keep dollar well-bid. On the other side, narrowing twin deficits, slowing inflation and improving investor sentiment on political change will keep Rupee well supported. Decline in RBI’s short forward positions also plugs a source of vulnerability. Markets also awaits government’s decision next month on the sale of $3 billion stake in state oil firm ONGC. The Modi government's sell-off drive is set to kick off with the offering of a 5 percent stake in Steel Authority of India. Other deals are expected to follow a similar pattern and on the slate are Coal India. These deals will keep upward pressure on Rupee. Therefore, while volatility due to spillover risks from hardening of US rates, strengthening of the dollar, global crude prices etc. cannot be ruled out but broadly Rupee is expected to trade in the 59-62 range as we have been repeating in our past reports. Going forward, inflation trends are likely to remain encouraging as the monsoon progresses hence opening up the space for policy easing in early 2015.
Technical
The technical trend remains largely unchanged for the USD/INR pair. Last week saw the pair reversing near its immediate resistance level of 60.40. Most of the indicators are giving neutral bias suggesting a rangebound trend in the coming week. The area around 60.35-60.40 will continue to be the resistance zone for the pair and even a breach of the same is unlikely to take it much beyond 60.52. Dollar has recovered from oversold territory and in fact William%R is now showing marginally overbought levels for dollar which further corroborates our aforesaid view. On the other side the pair can find support around 59.80 reigion and below that strong support is seen at 59.60 levels. Week’s Range : 59.70 – 60.50.