Rupee Advances to 8-Week High After Modi Budget
Comment of the Day

February 02 2017

Commentary by Eoin Treacy

Rupee Advances to 8-Week High After Modi Budget

This article by Subhadip Sircar for Bloomberg may be of interest to subscribers. Here it is in full:

Rupee rose to strongest in 8 weeks as PM Modi stuck to fiscal prudence in budget presented Wednesday, Fed signaled it wasn’t in a hurry to raise U.S. rates.

USD/INR falls 0.2% to 67.3725, lowest since Dec. 8; seventh day of losses is longest losing streak since Dec. 8

Positive stock sentiment in response to budget may keep INR bears at bay for now, Citibank says in note. Medium-term trend remains dependent on broader USD trend, global risk sentiment, oil prices

Tailwinds from declining oil prices, widening real rates now dissipating, issues of competitiveness may soon arise. Stays tactically neutral INR, no longer bullish for medium term

Buy rupee as India budget shows fiscal prudence, Scotiabank says 

Contained budget gap to give RBI room to cut rates, S&P Global Ratings says Govt endeavor is to improve on FY18 fiscal gap est., 

Economic Affairs Secretary Das says Expect bond yields to remain range bound over the next 5-6 weeks on positive investment demand from banks, CPI expected to stay sub-4% in Jan./Feb. and supply lull in February and March, says Morgan Stanley in note dated Monday
Expectations for RBI rate cut at the Feb. 8 monetary policy meeting Yield on govt bond due Sept. 2026 drops 3bp to 6.40%

Eoin Treacy's view

The Rupee had been reflecting widespread angst that the Indian budget would be inflationary in nature and that fear had been weighing on sentiment not least in the aftermath of demonetisation. With a more fiscally responsible tone being set, the Dollar has pulled back to test its progression of higher reaction lows. A sustained move below it would signal Rupee dominance beyond the short-term. 

If the Rupee can demonstrate more than temporary support in the region of its historic lows that could act as a greenlight for international investors to re-enter the market.

The Nifty Index has been largely rangebound since first testing the 9000 level in early 2015. It is now rallying once more to test that level and while somewhat overbought in the very short-term a sustained move below 8000 would be required to question medium-term scope for a successful upward break. 

The UK listed JPMorgan Indian Investment Trust trades at a discount to NAV of 9.07%. It has bounced from the region of the trend mean over the last six weeks and a sustained move below it would be required to question potential for additional higher to lateral ranging. 

The US listed Morgan Stanley India Investment Fund trades at a discount to NAV of 11.18%. It hasn’t traded above $30 for a sustained period since 2008 and a sustained move above that level would confirm a return to medium-term demand dominance.    

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