'Don't expect runaway appreciation in Indian rupee'

Updated: May 14 2014, 07:27am hrs
The last few weeks, speculators have expressed frustration over the lack of volatility or even intra-day trends in the currency pairs, including the Rupee against the US Dollar. Scalpers dominated proceedings, contending themselves with 8/10 paise range for the day. However, since last Friday, some trends have been observed. Sharp intra day swings have become the norm. Thanks to the hint from the European central bank, that further easing of monetary policy is possible, Euro, Pound, Yen and the Indian Rupee have shown some sharp moves. Euro has depreciated and Rupee has appreciated. US Dollar has gained against the Euro but has remained flat against the other major currencies. However, risk assets like emerging market equity, bond and currencies have received a nitro boost. Over the last few months, Rupee denominated assets have outperformed their peers and therefore, it was no surprise to see Indian equity and currency, both gain disproportionately post the ECB announcement. There is always a tendency for global speculators and investors to chase the best performing assets and hence the momentum driven trading has accentuated the up trend in the Rupee assets.

Month long national polls have drawn to a close and the just released exit poll surveys point towards the increasing likelihood of a strong and decisive mandate. The actual results will be known on 16th and unless there is no negative surprise, Rupee can benefit further. However, we do not expect a runaway appreciation in the Rupee, as RBI has shown enough commitment to procure US Dollars and support the foreign unit. Infact, when we turn the pages of history we realise that RBI has been a better defender of the US Dollar rather than the Indian Rupee. The limited size of US Dollar reserve compared with ability to print unlimited amount of Rupees, means RBI can indeed short circuit trends when the US Dollar is depreciating rather than the other way around. Infact, between Q1-2004 and Q1-2007, RBI bought over USD 100 billion from the open market to keep the USD/INR pair locked in a range of 43.00 and 46.50, at a time when Sensex rallied over 2.5 times and debt markets and FDI inflows were robust and CAD was still not an issue.

As a result, over the near term, we Rupee to see calibrated appreciation. A range of 59.00 to 60.25/50 can be seen, which can later shift down wards towards 58.50 to 60.00 over the next 2/3 months.

Recent economic data has been disappointing. Industrial production data for the month of March was weak, but not surprising as macros have not been an area of strength for the Rupee. Industrial output contracted by 0.5% in March and contracted 0.1% for the full year. Mining contracted by 0.4% in March and contracted 0.8% for FY14. Manufacturing contracted 1.2% in March and 0.7% for the full year. Electricity output saved the IIP as it grew 5.4% for March and 6.2% for the full year. Capital goods contracted 3.1% for the full year and consumer durables contracted by 12.2%, indicating weak consumer demand. Consumer level inflation rose to a three month high. The CPI-based inflation for the month of April came in at 8.59 percent, marginally higher than 8.31 percent a month ago. The data is at a three-month high with the food inflation inching to 9.66 percent against 9.1 percent. The rural inflation came in at 9.25 percent 8.89 percent, while the urban inflation was seen at 7.69 percent versus 7.51 percent respectively. The combined core inflation data for April remains unchanged at 7.8 percent. Core inflation data for April remained unchanged at 7.8 per cent.

ByAnindya Banerjee,Analyst, Kotak Securities