Will Indian rupee continue to throw alpha Yes, if FIIs willing to chase Indian equity bull market

Updated: Aug 27 2014, 22:47pm hrs
India rupee touched a 4-week high at 60.38 levels on spot, as FIIs poured billions of US Dollars into the domestic debt and equity instruments. Over this week, traders will keep a close eye on the Q1 GDP data as well the Q1 current account numbers. We expect GDP growth to show improvement over previous quarter but current account deficit can increase vis a vis Q4 FY14. There is little scope for fresh inflows in debt segment, as FIIs have exhausted all available investment limits in GOI bonds, and they not shown much appetite for other categories of debt. Therefore, whether Rupee can continue to throw alpha or not would depend on how much are FIIs are willing to chase the Indian equity bull market. Full Coverage: Indian rupee vs US dollar, others

Over the near term, support is expected between 60:35/40 levels, which if broken can expose 60:00/10 levels on spot. On the way up, the pair needs to trade above 60:60 and sustain, to open targets of 61:00/10 levels. Rupee continues to generate alpha for the foreign investor, as a result, we are seeing a herding behaviour in our domestic asset markets. Therefore, going forward, incase the momentum driven asset chase gets over, then Rupee might have a lot of catching up to do with where the US Dollar is trading in the global markets. However, over the medium to long term, Rupee is in a much stable ground, due to the monetary policies of the central bank. Breaking away from the past, the new RBI governor has walked his talk on the inflation front. He has not resorted to the quantitative easing, which his predecessor did. At the same time the central bank governor has kept the growth of narrow money under check. On one hand, when he infused Rupee liquidity through spot purchases of US Dollar, on the other hand, he ensured that the new money is offset by the reduction in the GOI debt portfolio. We continue to expect the RBI to play a hawk on money supply. As unbridled growth in money supply, without commensurate growth in productivity, is sure recipe for inflation, be it asset inflation or general price level inflation in the economy.

In Global markets, US Dollar has been appreciated against currencies like Euro, Pound, Yen, Swiss Franc, Canadian Dollar, where the interest rates are low. However, US Dollar has either remained flat or even depreciated against the currencies like Asian FX and EM FX. Asian and emerging market currencies are benefitting from risk-on behaviour in the Asian equity and debt market. Therefore, for the EM currencies to converge to global trend of the US Dollar, there has to be an increase in risk aversion in financial markets. Traders will keep a close eye on the German employment reports as well as the German retail sales. Eurozone and German CPI release will affect the trend of the Euro. A Weaker than expected can lead to further sell-off in the EUR/USD. Indian Rupee can track a range of 99.99.50 and 101.00/101.50 levels on spot and 78.50/79.00 and 80.00/80.50 against the Euro and 57.00/57.50 and 58.70/59.30 against the Japanese Yen.

By Anindya Banerjee, analyst, Kotak Securities