Rupee value play between FIIs & RBI
It was predictable roller-coaster ride on Rupee, hence was an enjoyable one with occasional shock and awe feeling! The satisfaction is from prediction of end of Rupee relief rally at 57.85-58.35 (on administered recovery from all-time low of 68.85) and the follow-on chase from 58.35 to 63.85-63.90 (to be precise from 58.33 to 63.89). Nothing fundamental or technical analysis worked; it is the feel of the pulse (and mood) of FIIs and RBI. Given the strong play between these two giants, traction with USD behaviour against global currencies was diluted. While FIIs were shipping in money in plenty for investment in equity & debt assets, RBI was absorbing the excess money to maintain demand-supply equilibrium and adjusting Rupee value to as close to REER. All taken, it was party-time for RBI to shore up its foreign currency reserves (and assets) to dilute structural risk from huge external debt of the system.
Rupee cues mixed between huge RBI appetite against diluted FII supply
2015 play will not be between FIIs and RBI; it is either end of party or at last round of the lap for FIIs as leveraged hot money chase will stay diluted or look at other attractive options elsewhere. The upside seen in 2014 is not there in 2015 both in debt and equity market, when Rupee may be at risk against USD strength in the absence of FII supply support. While there is comfort on India growth momentum, domestic structural woes continue to stay as headwinds. During the course of 2014, the strategic base for USD/INR was gradually lifted up from 57.85-58.35, now set at 62.85-63.35. On the other hand, there is no confidence as yet to set up strategic "cap" for the dollar given the lack of clarity on the dynamics in play and RBI's limited band-width to act on the other side for Rupee protection. At this stage, it is prudent to set the short term "cap" for USD/INR at 64.85-65.35; however, taking note of some opinions as high as 70, let us not rule out extended weakness in 2015 into 66.50-68.00, while seeing no case for new all-time low for Rupee beyond 68.85. All taken, will prefer 2015 USD/INR trading range not beyond 62.85/63.35-67.85/68.35. Given this outlook, it is good for importers to stay risk-off on short term (3-6 months) $ liabilities at forward rate below 64.50 (3M) and exporters to cover long-term $ assets at forward rate 67.00 (6M) and 68.50 (12M); hence set up of 12M $ range at 67.00/67.25-68.25/68.50 for hedge/carry-trade strategy.
USD retains bullish advantage against global currencies
2014 is the year for the USD against economic woes of UK/Euro zone and Japan, thus handing over the interest rate advantage to the USD. DXY has already posted sharp intra-2014 gains from 78.90 to 90.40 driving the Euro down from 1.40 to 1.21, GBP down from 1.72 to 1.55 and JPY down from 101 to 122. What next? The US economic and monetary dominance stay valid into 2015; US GDP growth momentum is firm (against subdued inflation) while other major economies are in struggle to get their economies back on growth track. On the other hand, while US prepare for shift to rate-hike mode, others are seen to be in extended QE and NIRP mode. All taken, DXY is seen ready to shift its short term trading range into 90.50-92.50 ahead of 95.85-96.00 and beyond. It is good to be in $ buy-dips mode to be with 2015 bullish trend.
Wish you all a happy & profitable 2015!
Cheers!
Moses Harding
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