Indian rupee at interim halt

The Indian rupee deprecation had an interim halt with RBI back again with a measure to halt the local currencies slide v/s the US dollar. The USDINR dropped below the 59 mark at the interbank dealing in Mumbai after the measures taken by RBI where it focused on tightening rupee liquidity rather than raising benchmark repo rate.

The Central bank increased Marginal Standing Facility (MSF) rate by 200 basis points to 10.25% and capped the amount banks can borrow from overnight markets to Rs. 75,000 crore. This is aimed to suck liquidity from the system. The central bank also said that it will conduct 0pen market sales of bonds of worth Rs. 12,000 crore to further suck out liquidity from the system. This has pushed the benchmark over 8.2% from almost 7.56% before the measure taken by the bank. Earlier, India’s 10 years G-Sec yield dropped to 7.11% level due to cut in rates by the RBI, while withdraw of funds from the bond market by FII and measures taken by the government has started pushing Yields higher. In the call money market, overnight rates such as MIBOR and call rates jumped above 9% concerning liquidity in the market.

The measures taken by the RBI seems to be an interim fix while we still need to address the structural problem facing the current account front. As per recent trade data, country’s merchandise exports during June fell 4.57% YoY to $23.79 billion signaling a wider CAD number during the first quarter of FY2014 despite imports have slowed. India enjoyed a current account surplus from 2001 till 2004 and from there onwards we are facing deficit in the account. The deficit started rising faster from 2010 breaking the 2% mark and currently hovering around 5-6%. Ceteris paribus, any further rise in the CAD may drain country’s FX reserves.

Till now, India has managed to fund the big CAD by importing foreign investments to local financial markets. However, it looks un-sustainable model as we have to pay a price during uncertainty, when foreign funds move towards safer havens such as US T-bills, Gold or Cash. If the global economy is heading for a crisis like 2008, then it looks vulnerable and it should get discounted to the national currency. However, as of now, the global economy is better off despite some ease off in China and some in Europe. 

Regulation to Rupee at 60 mark

Past three days have been eventful for the Indian FX market with market regulator started punishing market participants for representing the true picture of the economy. First, RBI barred banks to carry out prop trading in currency F&O market and then SEBI raised margin requirements by 100%.

The deprecating Indian rupee displayed the status of our external sector and how vulnerable it is in a global sell off. There has been withdrawal of funds by FII from the debt market and this phenomenon is seen across high yielding emerging nations. In India, this month FII have been net sellers at the bond market after pulling out net $5.7 billion from bonds. As speculation grew, that US Fed to taper with the QE by this year end, US treasury Yield moved higher and yield differential reduced with the high yielding currencies like India, where benchmark yields have been dropping since central banks have started cutting rates.

Indian rupee has dropped below the 60 mark v/s the US dollar, at the time of writing but again resurge back owing to the global phenomenon. Countries like Indonesia have started raining interest as they hiked the benchmark rate by 50 basis point beating market expectations and any such measures will be beneficial for India where we are running a negative real interest rate.

INR trending along with EM Currencies

A little dips is seem coming in USDINR after a sharp rally to 59 marks at the interbank market. Rates are dropping towards the support of 57.30 where possibly fresh surge may emerge.

As observed, the USDINR is decoupling with the dollar index (DXY) which tracks the US dollar performance of US dollar v/s major currencies such as Euro, GBP, and Yen etc.  It is now seen trending along with the direction of EM currencies v/s the US dollar.

Almost all EM currencies such as Korean won, Philippines Peso, South African Rand, Malaysian Ringgit, Thai Baht, Turkish Lira and Indonesia rupiah etc has seen depreciation of their home currencies v/s the US dollar from past few weeks on hopes of Capital account outflows. The cap outflow has started in local currency debt market in Indonesia, Malaysia and Thailand. Apart from that, FII remain as net sellers in EM Asian equities In June till date. The situation may aggravated further………..

v  As US treasury yield continue to rise following expectation of QE tapering by Fed by the end of this year

v  Asian economies are worrying about capital inflows which been flowing from 2009 and now they have given signal to market that they can go to extent of capital control measures. Thailand did first.

v  Export growth slowing in major Asian economies along with slowdown in China, requires their currency to depreciate 

v  Inflation easing across Asia, giving hopes for monetary easing. India, Indonesia Thailand already has cut benchmark rates and continues to do so in the near term brining yield differential lower.

India along with weak external sector compared to other EM nations may continue to see pressure on local currency. It seems USDINR may test 60 while 62 mark is non –deniable

Rupee- Short term trend

The USDINR January contract has been trading sideways since the start of December within a band of 54.50 to 55.60 levels. The market has recently turned bearish after posting a high of 55.60 and currently trading above the crucial support of 54.50.If the level is breached rates may form the second leg of correction and may decline towards 53.70 levels which is almost 100% level of the first leg (the first leg of correction was from 56.33 to 54.50).

The immediate trend is bearish and prices are trading below the trend line resistance of 54.98 levels. As long as rates hold below the level we expect weakness to continue and break below 54.50 could bring in fresh bearish momentum to the market. The daily RSI is sliding and quoting around 0.40 levels suggesting the short term bearish trend is alive. Prices are below the 100 day’s EMA which is pegged around 55.25.

Short term traders can look for selling the USDINR Jan contract around 54.75-54.80 targeting 54.50 and add fresh selling for next target of 54.00-53.70 with stop loss above 55.25.