Shorting the rupee could lead to gains

The Reserve Bank of India's (RBI's) decision to keep rates and cash reserve ratio (CRR) unchanged was shrugged off. The Nifty and Sensex ended the policy review session almost unchanged. The Bank Nifty Index saw a nominal negative swing, of minus 0.7 per cent.

One interesting point was that all the private banks listed in the Bank Nifty lost some ground. But, some PSU banks saw small net gains. The public sector bank index (down 0.3 per cent) also lost less ground than the Bank Nifty as did the CNX Finance (a 15-stock index including nine non-banking finance companies), which was down 0.5 per cent.

The latest CPI inflation numbers are in the range of 5.37 per cent (February 2015 over February 2014) while the repurchase rate is held at 7.5 per cent. Treasury bills are being sold at yields in the 7.7-7.8 per cent range.

There is a lot of newsflow over the next few days. On Thursday, the Bank of England (BoE) has a policy update. The Bank of Japan (BoJ) also meets over April 7-8. The BoE is not expected to touch low GBP interest rates. The BoJ has a large quantitative expansion going in addition to low rates. Inflation data is also expected from China, and trade data from Germany and France. On April 29, the US Fed meets and the BoJ will meet again.

India's March inflation data is released next week. Unseasonal rain could have pushed food inflation up. However, RBI expects to comfortably hit the targets of below six per cent (consumer prices) by January 2016. It hopes to push consumer inflation down to four per cent or lower by March 2018. Food and fuels will be key. If International crude oil prices stay low, those targets will be achieved.

RBI chief Raghuram Rajan dismissed worries about the US Fed raising rates, external factors will play a role. Europe, Japan and China are all easing respective monetary policies. The UK is unlikely to raise rates. The Fed has not yet announced a schedule for tightening. Switzerland and the Scandinavians are flirting with negative interest rates.

The fear is that the rupee will become over-valued if there is more monetary easing. In fact, the RBI's measure of a 36-currency Real Effective Exchange Rate suggests that the rupee is already over-valued by more than 20 per cent.

A strong rupee is an inflation deterrent since imports become cheap. But it also makes exports expensive. In nominal terms, the rupee has gained against four major currencies since January 2015. Post-Budget, it has continued to gain versus pound and euro.

This strength has had a negative impact with falling export volumes in the past few months. If ambitious targets of 200 per cent export growth in five years are to be met, or even approached, the rupee must be nudged to more competitive levels.

The next RBI policy update is in early June. By then, there will be some clarity on central bank stances. The rupee is likely to harden if RBI does nothing. Assuming RBI doesn't cut rates (or CRR) out of turn it will probably step up buying forex to hold the rupee down. There may be an opportunity here. Since January 1, 12015, the rupee has gained about 1.5 per cent against the dollar and a similar amount against yen. It has gained about six per cent against pound and a whopping 11 per cent against the euro. It's possible RBI could intervene to reverse those uptrends.

The author is a technical and equity analyst