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.
