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India Could See Gold Demand Rise On Rupee At Record Low

Published 06/11/2013, 01:21 AM
Updated 07/09/2023, 06:31 AM
The Indian Rupee weakened 1.4% to 59 per US dollar on Tuesday - it’s lowest level till date.
The S&P BSE India Sensex index dropped 1.1%, while the yield on the 7.16% government bond maturing in May 2023 rose to 7.30% from 7.28% on Monday. The Indian Rupee reached its weakest level against the US Dollar on Tuesday, weighed down by an unprecedented current-account deficit, the slowest Indian economic expansion in a decade, and speculation the dollar will gain if the U.S. scales back monetary stimulus. The INR – Indian Rupee now has the potential to drop way past 60 against the dollar, and the central bank “is unlikely to burn its foreign reserves” to defend it.

My second target of 59.05 stands achieved on Tuesday after the USD / INR Jun Futures hit a high of 59.13. The INR will remain weak until it remains below the 57.25 mark. This sustained weakness can lead it further to 60.40 and once below this mark, all the way to 62.20 also.

India’s rupee has also dropped to a record low on speculation the U.S. Federal Reserve will pare debt purchases that have spurred inflows into emerging markets. EPFR Global data indicated investors redeemed more than $6 billion from high-yield bond funds worldwide in the week to June 5. Global funds bought a net $15.3 billion of Indian stocks this year through June 7. A slowdown will leave the rupee vulnerable to an unprecedented current-account deficit, according to Westpac Banking Corp. “Asian currencies are in free-fall at the moment and it’s difficult to pick a bottom for the rupee,” said Jonathan Cavenagh, a strategist at Westpac in Singapore. “We are also possibly seeing investors who have strong equity positions in India hedging their foreign currency exposure, which is putting pressure on the rupee.”

Gold Demand may rise in India on Inflation Fears – Expect higher buying on each price dip:
Gold declined to the lowest price in more than two weeks in London on speculation the Federal Reserve will curb stimulus as the U.S. economy strengthens. Standard & Poor’s lifted its outlook for the U.S.’s AA+ credit rating yesterday to stable from negative, citing receding fiscal risks. Federal Reserve Chairman Ben S. Bernanke said last month the central bank could curtail its $85 billion monthly bond purchases if the economy improves. Upbeat sentiment over the U.S. economic outlook continues to feed concerns of increasing U.S. yields and an easing pace to QE3.

Any substantial price slump in Gold in the international (Dollar rate) markets will mean renewed & heightened buying frenzy for bullion in India – the world’s largest gold consumer. The depreciating Rupee will make gold costlier and dearer, giving cause enough for a dash for the Gold markets. This in turn will worsen the current account deficit scenario, which in first place has already been hit by the Indian consumers – depreciating the rupee further. That will take Gold prices in India much higher than ever before, if appropriate & timely steps are not taken. MCX Gold Futures for Aug shot up & hit an intraday high of Rs. 28,288 today, unlike the slump seen in the Comex Gold trades, before retreating as the Rupee recovered from the sharp 2 day crash.

Rupee slump dashes RBI Rate cut hopes:
On June 7, RBI Governor Subbarao said that India has a “current-account problem” and added that while inflation has “come off the peak,” consumer-price growth still remains “quite high.” The imbalance in the broadest measure of trade widened to $32.6 billion in the last quarter of 2012, equivalent to 6.7% of gross domestic product, fanned by gold and oil imports and subdued exports. The slump in the rupee to a record low has narrowed the RBI – Reserve Bank of India’s scope to cut interest rates next week for a fourth straight meeting. Subbarao had said May 30 that currency depreciation may stoke inflation and increase the cost of servicing foreign-currency debt. Wholesale prices rose 4.89% in April from a year earlier, a 41-month low, while the consumer-price inflation index climbed 9.39%. Gross domestic product rose 5% in the year ended March, the slowest pace since 2003. India’s interest-rate swaps rose to a one-month high on speculation the rupee’s slump to a record will give the central bank less scope to cut borrowing costs. The yield on the benchmark 8.15 percent government bonds due June 2022 rose four basis points to 7.53 percent, the highest level since May 13, according to the central bank’s trading system. The rupee will weaken beyond 60 in a sustained manner, said Rajeev Malik, a Singapore-based economist at CLSA Asia-Pacific Markets.

Rupee trims losses as exporters sell dollars & on intervention from the RBI:
On Tuesday, the absence of central bank intervention prompted importers to rush to cover future dollar needs, while exporters refrained from selling dollars in expectation that the rupee could fall further. The Indian Rupee recovered sharply from record lows on Tuesday afternoon, as three dealers cited dollar sales by state-run banks on behalf of the central bank. However, they said the size of intervention from the Reserve Bank of India did not seem too large, with the steep recovery in the rupee being exaggerated by liquid conditions in currency markets. The partially convertible rupee was trading at 58.47/48 per dollar at 2:04 p.m., off a record low of 58.98 hit earlier in the day, but still weaker than its close of 58.15/16 on Monday. Traders said the rupee was also supported by speculation that May wholesale inflation data due this week may show continued easing, and the media reported that the government was considering a special bond sale for non-resident Indians. Traders say dollar selling by exporters and a mild recovery in the domestic share market are hurting the USD/INR pair. The Nifty is trading down 1.18%, recovering slightly from a fall of as much as 1.63%.

Rupee depreciation will trigger Inflation, which will lead to higher Gold Demand:
Indian oilseeds and Soyoil futures edged higher on Tuesday on a weak Rupee and gains in overseas markets, although expectations of bumper oilseeds production due to ample rainfall capped the upside.

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