Indian Rupee Rises To Over 11-Week High, Bonds Weaken

The Indian rupee rose to a a lot more than 11-week high Friday on the back of heavy dollar inflows from Indian companies and tracking increasing global risk appetite.

The dollar was trading at INR49.31 late Friday in Asia--its lowest level since Nov. 8--and down from INR50.09 late Wednesday.

Indian bonds and currency markets were closed Thursday for the public holiday.

The rupee rose sharply at open to consider gains inside the euro and other risk-sensitive currencies over the previous two sessions following the U.S. Federal Reserve's announcement earlier within the week that it plans to carry rates exceptionally low until at least late 2014.

During trading hours, the rupee pushed higher on the back of heavy dollar inflows from Indian companies.

Most analysts are, however, unconvinced that the recent advances signal a reversal of the bearish trend as India faces problems such as slowing economic growth including a widening current account deficit.

Rupee jumps over 2 pct after RBI action

The rupee jumped more than 2% on Friday and was on track to post its biggest single-day rise in more than two years after the central bank took steps to stem the currency's plunge to a series of record lows.

At 10:47 a.m. (0517 GMT), the rupee bounced to 52.67/70 per dollar from 53.64/65 at close on Thursday.

After the market closed on Thursday, the Reserve Bank of India reduced trading limits for banks in the foreign exchange market, making it difficult for market players to keep speculative positions open for a long time.

While the measures should help reduce speculative volatility in the FX market, Morgan Stanley strategists said as long as global funding strains remain, the rupee is likely to stay under pressure.

Shares of some companies such as Bharti Airtel , the country's top mobile phone carrier, gained as traders said the central bank's action will help reduce losses on its foreign debt exposure.

Before the central bank waded into the currency market on Thursday, the rupee notched up a series of successive record lows falling to 54.30 per dollar on Thursday, a nearly 20% decline from July highs.

If Friday's 2% rise is sustained, it will be the currency's biggest single-day gain since May 2009, according to Thomson Reuters data.

But analysts poured cold water on the long-term effectiveness of these moves as the attractiveness of Indian assets have dropped sharply in recent months in the backdrop of a worsening domestic economic growth outlook.

Down more than 20% so far this year, Indian stocks are among the worst performing markets in Asia.

Data showed on Monday that India's industrial output slumped more than 5% in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5%.

Kotak Mahindra Bank strategists said fundamentals of a weaker domestic macro conditions and overall risk aversion in the global financial markets are expected to be the main drivers for the rupee.

For now though, the rupee seems to have found a temporary footing. In the offshore non-deliverable forwards market, one-month contracts were being quoted at a slight discount of 52.70 per dollar.

The Reserve Bank of India's policy review later in the day will also provide some direction to the foreign exchange market.

While markets do not expect an interest rate cut, analysts expect the central bank to signal a stronger resolve to intervene to hold up the beleaguered currency.

Rupee may continue to be under pressure: Brahmbhatt

Pramit Brahmbhatt, Alpari India said, "The rupee might continue to be under pressure on the dollar's strength globally. We may see more intervention from RBI if it weakens further. I don't expect any change in rates in today's Policy. The rupee is seen between 53.50-54.50/$."

Rupee opens at 52.90 per dollar

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The Indian rupee opened at 52.90 per dollar versus 53.66 yesterday.

Pramit Brahmbhatt, Alpari India said, "The rupee might continue to be under pressure on the dollar's strength globally. We may see more intervention from RBI if it weakens further. I don't expect any change in rates in today's Policy. The rupee is seen between 53.50-54.50/$."

RBI imposes forex strictures to defend Rupee

 
By Moses Harding, Head - ALCO and Economic & Market Research, IndusInd Bank

We discussed the need for RBI to think of measures other than intervention to prevent rupee weakness beyond 54. RBI?s intervention (how aggressive it may be) was ineffective in a highly dollar demand driven mode. The earlier measures to open up inflows through FII/ECB/NRI route did not yield desired result. Hence, the need is to explore ways and means to cut the dollar demand from the system and get the market into neutral mode to make RBI?s intervention effective. That?s what has been done now. The demand for dollars is now reduced significantly through blocking export cancellations; corporate speculation through performance based limits (mainly NDF trades) and limiting intraday/overnight exposure of Banks. The market was in heavily over-sold position with exporters covering most of receivables and importers/FC borrowers maintaining large open positions. The chance of exporters to cancel the existing contracts with intention to reinstate at better levels is now blocked; thereby cutting huge demand through export cancellations. RBI?s ineffective intervention resulted in widening arbitrage between off-shore NDF and on-shore OTC; thus generating huge dollar demand in the domestic market. This is also cut now. Other measures such as cutting the exposure limits for Banks are not very significant.
Over all, the huge gap in days? demand-supply is bridged and expected to stay in either neutral mode or shift into supply driven mode; thus bringing the Rupee exchange market in firm control of RBI. While many will advocate that these steps are not fair-play; RBI did not have any other option to arrest spread of currency woes into inflation and the economy. It was the last weapon as RBI cannot go the SNB way (to open up dollar sales counter at predetermined rate). It was discussed in earlier reports that rupee weakness beyond 54 will push the Indian economy into low growth; high inflation mode which would be economic disaster. It would need exchange rate stability at 51-54 till inflation worries are out of the way. Post that and firm downtrend in commodity prices, RBI would allow the rupee to float along with USD strength. Now, RBI can afford to turn into dollar ?buy mode? to release rupees into the system without CRR/OMO route. So, focus is back to the 51-56 short term range play while 54 remains firm in the near term. Rupee fall from 44 to 54 since August 2011 is excessive and it would have been in order if the market had shifted into supply driven mode at 54-56 to provide rupee stability at 51-54. When rupee woes are imported from external sector on which RBI did not have any control; use of these options can be considered as prudent (and sensible) if it could arrest rupee impact on inflation. Let us welcome these moves with pinch of salt for the good of the Indian economy.   
Policy expectations:
CRR: UNCHANGED. RBI has now has the option to inject liquidity through OMO purchases in the bond market and dollar purchases in the FX market; hence no need at this stage to cut CRR for the purpose to address tight liquidity above RBI?s comfort level of minus 1% of NDTL.
Repo rate: UNCHANGED. The moderation in growth momentum below 7.5% and headline inflation stubbornly above 9% will keep RBI in pause mode into January 2012 monetary policy review.
Guidance: NEUTRAL. RBI may not choose to sound dovish at this stage. Rupee woes are not completely out of the way. RBI has already exhausted all its options including strictures in FX operations. RBI will look for improvement in the external sector to get the worries on inflation and rupee out of the way before shift into dovish stance.
Currency market: We discussed that rupee weakness beyond 54 can push the economy into low growth; high inflation mode considered as disaster when RBI struggles to balance both growth pressures and inflation worries. Now that RBI has cut the demand, rupee is expected to be in consolidation mode at 51-54 with immediate bias into 52.50-51.50. Given the fact that rupee value around 51 is fairly valued, it makes sense to keep rupee bit undervalued for the benefit of exporters who have paid for these FX strictures losing their freedom to un-do past mistakes. So, providing stability around 52.50 will be in order. RBI would now have the option to operate from ?buy side? to supply rupees into the system. It is important for RBI to keep rupee exchange rate in its grip till inflation eases into 7%. The shift into low growth; low inflation (around 7%) will enable RBI to take dovish stance on monetary policy. We advised exporters to cover 1-3M receivables on extended weakness into 54 with 3M forward dollars looking attractive at 55.00-55.50. We saw a high of 3M dollars at 55.25 to bring in supplies which made RBI intervention effective to drive rupee from low of 54.30 for close below 53.70. We also asked importers to stay away for 53.50-52.50; now importers will get to buy cheaper dollars around 52.50. Having said these, fundamentals continue to remain weak. USD Index is bullish for gradual move into 89 in the short term tracking economic woes in the Euro zone and better economic performance out of the Euro zone. USD Index is expected to form a strong support base around 79.80 and prepare momentum to take out 81. Domestic stock market is also weak tracking growth pressures. Let us now look for consolidation in rupee at 52-53. It is important for importers to hedge on extended reversal below 52 where RBI is expected to get into dollar buy mode. On the other hand, exporters can sell 1-3M dollars on weakness into 53. Over all, 3M forward dollar above 54 will be good for exporters and 12M forward dollar below 54 will be good for importers.
EUR/USD is able to hold its weakness at 1.2950-1.3000 but the bounce from there lacks momentum and has held at 1.3050. Our strategy to exit short EUR/USD positions at 1.3000-1.2950 for bounce into 1.3050/1.3150/1.3250 is valid. We continue to watch consolidation at 1.2850-1.3150 with bias for extension into 2650. Our short term target continues to remain at 1.20-1.18. Strategy is to sell EUR/USD correction into 1.3050-1.3250 for 1000 pip dollar rally into the short term.  USD/JPY is in tight consolidation mode at 77.75-78.25. It is matter of time before see extended dollar strength into 79.00-79.50.
FX premium spiked to 7% in 3M and 5% in 12M (higher end of set near term range of 6.0-7.0% in 3M and 4.5-5.0% in 12M) before close at 6.75% and 4.9% respectively. RBI?s sale of forward dollars arrested test/break of higher end. Now, it is important for RBI to allow a bull run in FX premium to shift forward market into supply driven mode; leading exporters? supplies and lagging importers? demand. We will revise the near term range into 6.5-7.5% in 3M and 4.5-5.5% in 12M with bias into the lower end. This will also help release of dollar credit to exporters at affordable cost. RBI may need to keep FX premium high through purchase of forward dollars to arrest excessive reversal in spot rupee below 52.
Bond/OIS market: The initial gains in the market tracking lower US Treasury yields could not sustain getting the focus back into domestic cues. The initial rally found strong support at 8.45% (10Y bond); 7.75% (1Y OIS) and 7% (5Y OIS) before close at 8.49%; 7.79% and 7.10% respectively. RBI?s actions in the FX market will provide great relief. The fear is of RBI extending its pause mode in monetary policy on shift of currency woes into inflation; growth and fiscal deficit. This relief will provide kind of stability in Bond/OIS market. Let us look for consolidation at 8.40-8.55% (10Y bond); 7.65-7.80% (1Y OIS) and 6.95-7.15% (5Y OIS). The strategy is to play end-to-end as test/break either-way is not expected to sustain.
Commodity market: Gold found support above 1560 (low of 1564) held at upper end of set 1500-1600 range (high at 1593). There is no change in expectation of extended weakness below 1560 for 1520-1500. In the meanwhile NYMEX crude failed close to higher end of set near term range of 90-97 for move below 95 and looks good for extension into 90. Let us now watch 90-95 with bias into the lower end.
NIFTY: The initial weakness in NIFTY held at the immediate support at 4675 (low of 4673) for decent bounce into 4773 before close at 4746. RBI?s actions in the FX market will provide bit of relief to domestic stock market to provide consolidation at 4675-4825 with overshoot limited to 4650-4850.

51-54 is a right range for rupee: IndusInd Bank

The RBI has restricted the net end of day open positions and the intraday open positions that banks can carry. The central bank has also restricted the extent to which importers and exporters can punt in and out of dollars on the basis of their expected earnings.

In an interview to CNBC-TV18, Moses Harding, executive vice president of IndusInd Bank says, this move was not a surprise.

He further says, rupee weakness beyond 54 is very bad for the economy. According to him, 51 is a fair value. "51 to 54 is a right level till the RBI sorts out inflation."

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: What do you suspect is going to be the impact? Will we see a rupee appreciation tomorrow?

A: This move was not a surprise because RBI has abutted almost all its ammunition. Their intervention was ineffective in a highly demand driven market. So, RBI has to cut is demand side through fixtures and FX operations.

They have done three things. The foreign institutional investor (FII) thing is almost liquidity neutral. The most important is the impact on the exporters. Exporters who have sold dollars say at 47-49, they have a chance to exit that 53-54 and re-enter at 56-58. That?s not possible anymore. So, to that extent that would be capping the demand.

Structurally most importers are uncovered and exporters are largely covered. That means we are talking about a big chunk of demand being taken away from the market. I don?t see a great impact on the net open positions.

Most of the PSU banks don?t use it. Largely credit and foreign banks use it. Stopping exporters from cancellation on rebooking is a major impact.

Q: How will the rupee trade tomorrow?

A: This reversal is from three grounds. One is stability in Euro dollar on 1.30 and Nifty stability around 4,700. More importantly, the sharp spike in premium, we have got a three month premium at Re 1.That brought in supply in the short run. So, when the supply became neutral, the flows become neutral, RBI was a bit effective today.

Given these fixtures on asset operation, I think now 54 is toppish. I think we are getting into a 52-54 level. Fundamentally, rupee is still in a bearish mode.

Q: Would you say that at current levels of 53.60 practically all the overvaluation is over?

A: Ideally rupee weakness beyond 54 is very bad for the economy. That pushes economy into low growth, high inflation scenario; 51 is a fair value. So, 51 to 54 is a right level till the RBI sorts out inflation.