Extended relief in the absence of RBI hurdle:
Rupee derives strong support from domestic cues (and evolving favourable dynamics) such as significant improvement (and optimism) on macroeconomic fundamentals, elevated FX premium and adequate external appetite. Given the Tsunami kind of domestic tailwinds, external headwinds from USD strength, Greece/Euro crisis and global growth worries from crash in Crude Oil price couldn't make any impact on Rupee. The result was obvious for sharp recovery in Rupee from 63.75-63.90 to 62.80-62.95, seen as RBI $ protection zone (and good value to build $ reserves). It is also not surprise that without change in operating dynamics, withdrawal of RBI bids at 62.80-62.95 could only lead to accelerated Rupee recovery in an otherwise $ supply driven market, both in cash and forward markets, thus extending Rupee recovery below 62.80 into 62.20-61.70 for 100% unwind of sharp $ rally from 61.70-61.85 to 63.75-63.90.
RBI in search of demand-supply equilibrium level:
RBI is seen losing its huge appetite for $ given its limited ability for Rupee sterilisation from the domestic money market, which is in liquidity over-hang mode! Given this stance, it does not make sense for RBI to supply cheap Rupees to external investors, which resulted in more leveraged flows. Now, the search is for USD/INR level where FIIs will lose appetite and importers (and FC carry-trade borrowers) will consider good to cover short/medium/long term $ liabilities exposures. On the other hand, there will be need to push FX premium sharply down to flush out medium/long term $ supplies in the forward market from exporters. The change in dynamics is the fact that while RBI delayed rate-cut on Rupee risk, now has great comfort for delivery of one-shot 50 bps rate-cut with great comfort on Rupee, without worry even it would push Rupee down to 63.75-63.90, seen as fair value adjusting to external dynamics.
What next?
It is win-win for all; exporters are covered across the curve, March 2015 around 65.00 and 12M over 68.00 (at spot over 63.70) while importers (and carry-trade borrowers) are partly covered in the near term (at spot 61.70-61.85) and open across short/medium/long term. All taken, it should be great relief for most (if not all) stake-holders! It was great ride for strategic traders from 61.70-61.85 to 63.75-63.90 to 62.80-62.90 with stop loss short-entry below 62.80 for 61.70-62.20.
The expectation on the way forward is to find demand-supply equilibrium at 61.70-62.20; post which delivery of 50 bps rate-cut (now or soon) and resultant squeeze in FX premium will shift Rupee focus from 61.70-62.20 to 63.35-63.85. Hedge and trade strategies will be built based on this outlook for near-term sideways consolidation at 61.70/62.20-63.35/63.85 till end of FY15.
Moses Harding
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