New Document top_band
 
Business Standard

Weak outlook for the rupee

Read more on:    Insight | Rupee | Dollar | Euro | Sterling | Yen | Fii | Ecbs | Fccbs | Rbi | Euro Zone | Weak Outlook
Related News

The has begun 2012 on a note that suggests there will be as many trading opportunities as in 2011. In the first five weeks, the rupee gained eight-nine per cent against the , , and . It's moved from a low of nearly Rs 54/ dollar to a recent high of Rs 48.6. At an average futures leverage of 50:1 that's tasty for any trader who got the trend right.

The correlation of rupee's gyrations with foreign institutional investors () attitude is apparent. In that same five-week period, portfolio investors made net buys of $3 billion of Indian equity and also bought $3.4 billion of rupee debt, mostly treasury bills. If foreigners stay positive on India, the inflows could push the rupee up even further, to test resistance at Rs 46.5.

Several situations could affect the current uptrend. One is a collapse in the if Greece defaults or there is trouble in Spain, France, Portugal, Italy, etc. That would probably lead to the dollar hardening versus the euro, as investors flee to the safety of US treasury bills. The rupee would weaken against the dollar but strengthen versus the euro.

Another interesting situation could arise if India's forex-denominated corporate debt such as and require refinancing and redemption in rupees. This would probably drive the rupee down again if there is major redemption pressure.

A third scenario would be a reversal of the Reserve Bank of India's ('s) tight monetary policy. If RBI does cut interest rates, the first logical effect should be the rupee weakening, as the rate-differential between the rupee and hard-currency regimes narrows. Right now, Indian treasuries yield around four times as US T-Bills and twice as much as Chinese bonds.

Rupee rate cuts would be good for the corporate sector and cuts may induce FIIs to invest more heavily in Indian assets. I think the correlation between FII flows and rupee exchange rates is stronger than the correlation of rupee movements with respect to interest rate parity. Of course, I could be entirely wrong.

In early January, Bloomberg said two forecasters, with the most accurate records in 2011, suggested the rupee will be at somewhere between Rs 50.5 to 51/dollar by December 2012. Those estimates may have changed, given what happened in the next four weeks.

Technically, the dollar/rupee looks set to see a reaction from Rs 48.7 till around the Rs 50.5 level. It's already moved down to Rs 49.4. This would imply some more FII selling. If you decide to play that move by going long the dollar/rupee, set a stop-loss at around Rs 49.


The author is a technical and equity analyst

Read more on:   
|
|
|
|
|
|
|
|
|
|
|

Read More

India VIX soars as market drops sharply

Implied volatility soared as traders flocked to options ahead of the Budget to hedge their positions in the cash market

Quick Links

 

Market News

Those who took the plunge when others were fearful

Between June 2013 and June 2014, the promoter holding of both firms has remained constant, at 45.63% for FTIL and 26% for MCX

Only in India, tech on top of m-cap charts

India is the only country in the Brics pack to have a technology firm as the largest public company. China and Russia have energy companies at ...

Tech provider be neutral of commex ownership: FMC

Regulator mulling no entity with significant shareholding be allowed to be tech provider

Slowdown likely for diamond processors

Global rough diamond miner De Beers forecasts a slowdown in sales, Indian companies toface the heat

Indian setback helping global iron ore miners

India, very rich in iron ore, is becoming a major importer of the steel-making ingredient

Back to Top