Rupee to dollar: Trend in the US dollar remains upward

Updated: Aug 13 2014, 03:54am hrs
Indian Rupee after weakening to our expected levels of 61.70/80 on spot, turned higher towards 61.04/06 levels. Large offers from the sovereign and also from FIIs pulled the pair lower by the close of trading on last Friday. Over the last two sessions, the USD/INR has been caught within a range of 61.05 and 61.25 levels on spot. Economic data has been lackluster from India. Globally, data points from Euro zone continues to paint a picture of weak economic fundamentals of a non-Germany Euro zone. Even in the Germany, sentiments indicators, like ZEW and IFO have started to fall sharply, raising alarms bells. Check updates: Indian rupee vs US dollar, others

In India, industrial output grew at meager 3.4% in June slowing from 5% in May of this year. Manufacturing, which accounts for the nearly three-fourth of the index, rose by only 1.8% in June. For the first three months of this fiscal year, IIP grew recorded a growth of 3.9%, as against contraction of 1% in the first quarter of 2013-14. A sharp contraction in consumer goods caused the weak growth in industrial output. The weak growth in IIP stand out as same month last year, IIP had contracted by 1.8%, leading to a low base benefit.

Consumer inflation rose to 7.96% in July from upwardly revised 7.46% in June. Food inflation accelerated 9.36% in July from 7.97% in June. Sharp increase in vegetable prices caused the consumer inflation to spike. RBI governor has repeatedly warned that India's high inflation is cause of worry and unless it is cured in a sustainable manner, currency would remain weak and growth can be of poor quality. We have had mentioned a number of times in our research reports, that inflation is a monetary phenomenon and until and unless growth of money supply is curbed, inflation problem can not be cured over the long run. In recent newspaper articles, quoting from a report prepared by National Institute of Public Finance and Policy on India's illicit economy, said that the size of black economy may be as high as 75% of the accounted for GDP. The report has cited education sector, mining sector and the real estate sectors as the largest contributor to the parallel economy. Therefore, when we talk about money supply, we refer to it in its entirety. RBI governor has also warned the current downtrend in inflation is being amplified by the high base of last year. Therefore, unless he sees a sustainable downtrend on that front, he might keep monetary policy neutral to tight. It is to be noted, that India being a part of the globalised economy is also exposed to the inflationary policies of the other G-8 central banks and governments. Therefore, RBI has a very tight rope to walk between challenging objectives of price stability, growth and financial stability.

Turning our attention to financial markets, for the rest of the week, traders have lot of data to chew from Europe, China, Japan and US. Tomorrow, China is scheduled to release its industrial production, fixed asset investment and new loans data for the month of July. Japan also is scheduled to release Q2 GDP data as well as it core machinery orders data for the month of June. France and Germany goes to the well with their respective Q2 GDP prints, where market expects a contraction in Germany. Tomorrow, Pound traders have to negotiate a barrage of UK inflation, jobs data and testimony from the BOE chief. In US, retail sales of last month and industrial production data are going to market movers.

The intermediate trend in the US Dollar remains upward, as US economic data as well as imminent conclusion of QE3 keeps monetary policy play on in Greenback. As far as the Rupee goes, it will continue to trade in sync with the emerging market currencies, viz., the Brazilian Real, South African Rand and Indonesian Rupiah. Technically, we expect strong support between 60.60/61.00 levels on spot, where importers can consider to cover their near term payables. Over the near term, a range of 60.60/61.00 and 61.60/80 can be seen.

Anindya Banerjee, analyst, Kotak Securities