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Rupee To Trade In A Range Of 63/63.30 And 64

Monday, June 22, 2015
By Anindya Banerjee

Anindya Banerjee Currency Derivatives Researcher, Kotak Securities

So did US Fed “chicken out”? We do not think so. However, they have definitely tried to play safe, and also like a ritual, did what they have done so many times since the Great Recession, down grade their economic forecasts to a more realistic level. They are not alone in this, IMF and much of us, the buy/sell side community is guilty of that. Enough ink has already been spilled as to explain why the structural reset has confounded most observers but let me talk about another angle to economic forecasting. Economic forecasting is like driving through a mountainous stretch in a thick fog. The driver has a fair idea where the road leads to and where it wants to go. However, visibility is limited to a few meters and hence one has to be alert. The driver knows that it may have to alter course and make sudden evasive maneuvers, if the situation demands. Economic forecasting should also be done and accepted in that light.

Would the Fed hike in December or next year? It does not matter, as long as they do in the near future. The bigger question is what is the overall bias of their monetary policy and why did they refrain from committing to a timeline. I believe, US Fed sees the situation in Euro zone as fluid and serious. The game of thrones being played in Euro zone, a political theater, is both dangerous and dramatic. US Fed did not want to box themselves in a corner, by calling a timeline, and then see “Grexit” become a reality and markets turmoil. US Fed may have wanted to keep the flexibility on, so that, incase Euro zone finds  another innovative way to kick the Greek can down the road, like they have done umpteen times over past six years,  US Fed can bring the rate hike theme right back on table.

Back home in India, our external trade for the month of May, moderated further, not a very encouraging sign. Sluggish exports growth momentum and renewed signs of weak domestic demand-led fall in imports aided the comfortable trade deficit print. In my last week’s column, I explained the causes behind the improvement in current account balance. The sharp contraction in core imports, ex-petroleum and ex-gold, is a sign of weak domestic economy. The core imports plunged by 3.5% in May, after rising 7.1% yy in April. However, capital goods imports remained stronger. Of late, the capital goods segment has been strong in IIP composite index as well. These indicate that the investment cycle has started to move, though the pace remains moderate.

In a positive development, monsoon has started well. Based on data available with IMD, till 19th June, out of 36 meteorological sub-divisions in the country, 16 have received excess rainfall, 7 have received normal rainfall, 9 have received deficient rainfall and 4 have received scanty rainfall. The next 30 days will be key for monsoon, as normal rains over the next 4 weeks, shall ensure a strong sowing of agricultural crops. A bumper harvest shall push prices of agricultural commodities lower and ensure food inflation not become a problem. A lower inflation can bring about some more ease in the monetary policy rates over the coming quarters. However, remember, in case of bumper crop, with global commodity prices on a down swing, we can see rural India get into income stress later during the year. However, for urban India, it is a gain and so for Indian bonds.

Over the next week, traders will wait and see, whether RBI hikes the government debt limit for FIIs, as expected. At the same time, Greece has become a political battlefield between Germany and Southerners. A messy Grexit, can be negative for risky assets. At the same time, an interim reprieve can bring about a relief rally in stocks and EM currencies and Euro as well. Indian Rupee to remain in a range of 63.00/63.30 and 64.00 over the near term.

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