Rupee Weekly

INR Weekly

January 11, 2010

CMP: Rs.45.85/USD

Fundamental Analysis

USDINR came out of its range in which it was trading for past eight weeks to fall by

1.8% in the entire week from Rs.46.70 to Rs.45.85 levels. The fall was in line with our

fundamental and technical expectation in past several weeks that USDINR has touched

its over bought levels and we expect the pair to correct. However no significant event

occurred this week on domestic front but news of rate hike in china did affect the

sentiments of the market. Inflation numbers did not show drastic increase but prices of

certain food articles like sugar continued to rise.

Indian Liquidity Scenario

A look at liquidity scenario in the country indicates demand for Credit rising up slowly.

Commercial Credit growth which fell to 9% rose to 11% by the first fortnight of

December however M3 which is a broad indicator of Money flow in the economy

continue to fall. A divergence between Credit Growth and Money Flow indicates a tight

liquidity situation may arise in near future.

10 year benchmark yields continued to increase with yields quoting at highs of 7.66%

levels. The rise however was in anticipation of increase in interest rate by the

government.

Looking at the tools in

government's arsenal we feel

that there are only 3 options

left to in the monetary kitty of

the government.

(1)Withdrawal of Stimulus

Packages (2) Hike of CRR (3)

Increase of interest rates.

However sucking of liquidity

from the system will not be

effective as rise in agriculture

commodity prices have been

mainly due to demand supply

dynamics rather than excess

liquidity.

Global Scenario

Yen continued to fall against the dollar as Japan retreated keeping yen at lower levels

against the greenback. However surprising news came from china as China's central bank

began to roll back its monetary stimulus for an economy poised to become the world's

second-biggest this year, seeking to reduce the danger of asset-price inflation after a

record surge in credit.

Chinese Central Banks sold three-month bills at a higher interest rate for the first time in

19 weeks. The central bank has kept its benchmark one-year lending rate at a five-year

low of 5.31 percent.

Conclusion

Looking at USDINR prices in coming week we the downtrend to continue. The fall of

M3 in the economy as well as rise in Credit Demand is expected to provide support to the

rupee. Secondly signs of monetary tightening by Chinese are expected to be good for

Indian economy. An in-depth analysis of Chinese economy revels that the reason for rise

of China as a economic superpower is due to (1) cheap Credit (2) Government Subsidies.

A possible credit tightening is good news for Indian export industry which will lead to

strengthening of Rupee. Overall we expect USDINR to touch Rs.45/USD in coming days

India 10-Yr Benchmark yields have started moving up

once again after a phase of consolidation

Source: Bloomberg

Technical Analysis

A breach of a triangle on weekly charts markets the pair bearish in coming days.

However 200 days moving averages might provide support for the pair which may prove

to be hindrance for its free fall. Overall 45.77 and 44.82 will be key support for the pair

below which pair can touch 42 levels.