The all time low of 52.73 (posted on 22 November 2011) is taken out as rupee fell to new low of 52.85 before close at 52.84. The reversal since 22 November driven by RBI’s measures to “lead” foreign currency supplies helped rupee recovery into 51.19 (2nd December 2011) but strong bearish set up on rupee from both domestic and external sectors brought rupee back into bearish trend to post a new historic low in quick time. The short recovery cycle before quick shift into rupee bearish mode is a serious concern for RBI (and the economy).
There is nothing positive for rupee at this stage. The uncertainties (and complexities) in the Euro zone is adding to dollar strength with USD Index holding above 78.20 and in preparation to take out immediate resistance at 79.65-79.80 for 81.00. This will drive the EUR/USD down into 1.30-1.28. The other immediate concerns are from widening trade gap; political issues in attracting long term capital flows and growth issues leading to weak stock market. The downtrend in EUR/USD (into 1.28-1.25) and NIFTY (into 4350-4250) are serious threat to rupee. The comfort is from declining trend in commodities; shift into growth supportive monetary policy and aggressive supportive actions from RBI to prevent run-away rupee weakness. Having said these, rupee was expected to trade within 51-54 into the short term given the weak market dynamics. Therefore, reversal from close to 51 was not a surprise but the speed of reversal is a concern. The way forward is not looking good for rupee. The fundamental concerns on trade gap; capital flows and growth pressures will stay valid into short/medium term. The higher fiscal deficit and low growth might bring India into rating watch. Over all, rupee bear run is expected to continue into short term. The immediate target is for quick run into 53.50-54.00 to complete end-to-end move within the set short term range of 51-54. While it is difficult to take a view beyond there; greenback will look good to sell for 5-7 years tenors. RBI has already lifted the “cap” of USD 100 mio net supply position for Banks; extended weakness beyond 53.50-54.00 is good for large companies to shift long term rupee liabilities into dollars. At this stage, let us not rule out extended weakness beyond 54.00 on strong USD Index above 81.00 and weak NIFTY below 4250; however, prefer this as a low probability occurrence. Rupee is already down by over 20% from 43.85 (27th July 2011) to 52.85 (12 December 2011); hence it is not prudent to chase weakness beyond 54.00.
Moses Harding
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