Rupee benefiting from inflows, but future trend depends on US Fed

Updated: Aug 22 2014, 03:07am hrs
Over the last one week, Indian rupee has outperformed many of its peers in the global market. Rupee touched a one month high against the US Dollar, at 60.50/52 levels of spot. FIIs have poured in over USD 2.5/3 billion in debt and equity segments in India. Globally, though low yielding currencies like the Euro, Pound, Swiss Franc and Yen have suffered in the hands of the US Dollar Bulls, but high yield or high growth currencies from Asian and EM basket have not only held their ground, but even some of them, like Rupee, appreciated. Rupee tends to follow the EM and Asian basket more than the old world majors. Full Coverage: Indian rupee vs US dollar, others

Therefore, unless we see a reversal in the trend of the US Dollar against these currencies, we would not be too eager to chase a rally in the USD/INR just yet. Infact, we had expected and wrote about it in our research recommendation, that Indian Rupee can run into a support around 61.70/85 region, from where a pullback can take it back towards 60.70/80 region. The pair has indeed pulled back from 61.70/80 levels.

Over the near term, traders would need to focus on the rhetoric from the US Fed Chair, Janet Yellen at the Jackson Hole Symposium. Incase, she sounds a tad hawkish, which the market is not expecting, then we can see a possibility of pullback in the Rupee, on the back of possible sell-off in the emerging market equity and debt. US economic data continues to surprise on the upside and because of which, US Fed has started hinting towards a possible reversal in the interest rate trajectory next year. With the US Fed being a major supplier of financial liquidity, which infact has more or less eclipsed the uneven global economic recovery and also simmering geopolitical tensions, it is not a surprise too see financial markets repulsed by any hint of policy tightening. Going forward we need to keep an eye on the US economic data, which as long as remains robust, can keep the US Dollar resilient.

In economic news, PMI surveys for the month of August indicates that the US manufacturing sector continues to witness strong tailwinds. However, in Euro zone the economic trend remains weak, with Germany showing resilience but the rest of the currency bloc very much battling with high unemployment and weak business sentiment.

FIIs have nearly exhausted all of the GOI bond limits which are available to them. Therefore, major source of fresh inflows of foreign currency can happen either through the portfolio investment route in the equity markets or through chunks of FDI deals. We expect FDI inflows to pick up steam in the coming as GOI is getting active in formulating smart and effective policies. However, as we have written previously, currency is a game of relative attractiveness. Therefore, one need to always compare of checklist of domestic factors with global ones on a regular basis. The importance of one over the other keeps changing with the change in sentiment.

Technically, USD/INR has a strong band of support between 60.40/50 levels, which if broken, can expose 60.00/10 region. We can expect RBI intervention on US Dollar, incase spot gets close to 60.00 handle, as without which, it can quickly drop towards 59.70/80 region. However, as long as 60.40 holds out, hopes of a near term bottom will be there. In such a case, a bounce back towards 61.00/30 can occur.

By Anindya Banerjee, analyst, Kotak Securities