Expert View: Rupee outlook on Monday

Last Updated: Mon, Feb 13, 2012 04:53 hrs

Market Recap:

Feb USDINR closed at 49.65, down 5 paise. Spot USDINR closed 49.41 from 49.50 and traded the range of 49.37-49.76. Friday saw USDINR ending weaker ignoring the increased risk aversion which had supported USD versus other higher yielding currencies as well as a 0.5% decline in domestic equity indices. USDINR came under steady pressure after a brief dash above intra-day resistance on price charts near 49.60, following reports of strong dollar sales from state run banks, adding to speculations that the Reserve Bank of India may have intervened.

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Separately data showed that economic growth slowed sharply in Dec to 1.80%, sharply below market consensus at 3.0%. The following excerpts on details of industrial production growth in Dec appeared in MFGR's Indonomics report released Friday.

IIP growth falls to 1.8% due to adverse base effect as the sequential growth rate is strong at 6.8%, considering the previous month’s strong up move. All the use-based sub-indices recorded strong/trend growth sequentially, except for capital goods.

Consumer non-durables recorded a sharp jump in output in line with the trend, index was at historical high. Other industries that recorded strong growth are food products, apparels, office machinery.

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Overseas, risk aversion was on rise helping adding to safe haven related USD purchases. With EU adding fresh demands and insisting that these be met or the new bailout fund release would not proceed led to a slide in higher yielding currencies, particularly euro. EU insisted that Greece secure a written agreement by all coalition members to implement the new austerity measures, that the parliament actually vote on these austerity measures when it met Sunday and that it secure additional 325 euro cuts in spending by Wednesday.

On USDJPY front, the comments from Finance Minister Azumi suprised the markets. In a response to question about the effectiveness of FX intervention in Oct 2011, Azumi ended up revealing the levels at which the intervention had happened. But hastily added that these levels were the numbers put forth by opposition member. Azumi said that he had instructed the intervention at 75.63 level and that the intervention had stopped at 78.20. While USDJPY hardly showed any reaction to these reports, the comments over specific levels were surprising.

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Azumi under increased pressure following these comments clarified again and warned that these levels would not be the specific levels to look for in future. He stepped up the ante saying that he wouldn't hesitate to intervene unilaterally. There has been market chatter, that Japanese FX intervention might run into protests from US and Europe.

Market Outlook:

Spot USDINR has opened at 49.44 from 49.63 Friday and was trading at 49.40. USDINR could trade in 49.36-49.58 range. USDINR direction is likely seen choppy at session start with no clear direction from currencies and equity markets. USD has been trading tad weaker against the majors and mixed against the Asian units. On equity front, early session has seen domestic indices sliding into negative territory.

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Market focus very much remains on Greece. Sunday saw Greek parliament voting in favor of the new austerity measures to secure 130 billion euros in next round of bailout. Sunday also saw protestors stepping up violence to protest against acceptance of these new measures with reports of nearly 10 buildings being set on fire in central Athens. While the Greece is fighting to stay in euro area, secure funding to avoid default, at the cost of accepting severe spending cuts, the real economy has suffered and with every additional measure, likely to do so more.

Data shows that industrial growth sharply fell by over 10% in Dec and unemployment level has topped 20% in Nov. Meanwhile, the markets remain cautious despite the Greek parliament vote, as the Greek private sector initiative agreement is the next point under focus and needs to be concluded to fully comply with the EZ wishes for securing bailout funds.

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Greek FM Venizelos was quoted in reports as saying that the country has to make final offer on bond holders on Friday, Feb 17, after which it would be put for vote before the parliament there and thereafter the euro area deputy finance ministers would meet to decide on the further action. With Greek saga is set to extend, risk aversion is likely to cap sharp gains in high risk-yield currencies against the US dollar.

On domestic front, Tuesday's inflation data for Jan would be under focus. As hinted earlier by RBI officials, the inflation rate has to show definite and strong declines for the central bank to pursue rate cuts. With the focus shifting towards supporting growth, the central bank has halted the rate hike spree and indicated it clearly so. But it has stopped short of actual rate cuts, as it considers present inflation level as 'uncomfortable'.

Meanwhile, Friday's IIP data and that for previous month is indicating positivity (Dec IIP was at 1.80% vs 5.90% in Dec, but the sequential growth rate is strong at 6.8%, considering the previous month’s strong up move.). According to MF Global India's economist Anjali Verma, this trend might continue in the coming months. PMI, (industrial outlook indicator) is also reflecting growing expansion. Improving optimism is on account of the CRR cut and expectations of more rate cuts, and likely improvement in government operations. Positivity would emerge as soon as the RBI starts to reduce the rate which started with the CRR cut. RBI will have to continue with the rate cuts in 2012. MFGR expects RBI to cut repo rate by 25bps in March-April policy. Q3FY12 GDP growth is expected to be much lower than seen previously in the rage of 5.5%-6%, which will act as a driver to induce RBI to fasten the rate cut cycle. We expect RBI to cut interest rates by 150-200bps in 2012.

On a medium term hopes of rate cut and a favorable Union budget could keep the equity market sentiment supported and in turn weigh on USDINR. But at the same time, a sharp fall is not expected , as the events overseas on Greek front are likely to keep markets tentative.

Technical Trades Outlook:

USDINR: Support at 49.36, 49.2, 48.83 Resistance at 49.58, 49.81, 50.1. Currently in a consolidation trend ranging 48.83 to 49.75. For the session further downside projected to hold 49.2 and range to 49.58

EURINR: Support at 64.7, 64.3, 63.75 Resistance 66.1, 66.35, 66.64. While downside remains protected at 64.3 look for advance to 66.35 / 66.64 but will need a close above 66.64 to confirm a build up of sustained higher move

GBPINR: Support at 77.55, 77.15, 76.7 Resistance at 78.25, 78.9, 79.65. Trend is in consolidation with downside holding at 77.15 and trade range to 78.9

JPYINR: Support at 63.2, 63, 62.45 Resistance at 64.5, 64.85, 65.5. The hold at 63.2 should help for a corrective pull back to 64.5/ 64.85

EURUSD: Support at 1.312, 1.3086 Resistance at 1.332, 1.3385, 1.345. Downside seen protected at 1.312 and trade higher towards 1.3385

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