Tuesday 7 May 2013

Currencies Monthly Update - Rupee Gained Marginally Against US Dollar in the month of May, RBI Cuts Repo Rate













USD-INR MAY A break below 53.80 can test 52.65 level else range
could be 53.80-54.60.

EUR-INR MAY Sustained below 72.00 can retest 68.80 level


JPY-INR MAY Yen is holding below 100 mark a break can show
further weakness till 104.50 level that can test
52.00 level in JPYINR


GBP-INR MAY GBPINR may see some consolidation but sustaining
above 83.00 can test 85.20 levels again.





Latest Update

The Reserve Bank of India cut its benchmark repo rate by 25bps to 7.25% and adjusted its interest rate corridor accordingly leaving the reverse repo rate
lower by 25bps (now at 6.25%) and its lending rates down by a commensurate amount too (now at 8.25%). The logic of the rate cut is that India is not
growing at a desirable pace with GDP at 5% y/y in Q1 2013 and export growth fluctuating between being flat and lightly positive on a year-on year basis. The
challenge that India confronts is that inflation is running rampant, with CPI notching a lofty 10.4% y/y print in March. A slight slip in wholesale prices in March
gave the RBI room to justify yesterday’s marginal interest rate cut, but as the statement noted, “Overall, the balance of risks stemming from the Reserve
Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing.”


Market Roundup
• Foreign Exchange - Shifts in investor sentiment will continue to be reflected in the value of the rupee, as the country suffers from a large current
account deficit, a negative sovereign credit rating outlook, weak government finances, and political instability. Nevertheless, a relatively
temperate fiscal plan combined with further monetary stimulus to boost economic growth prospects should provide modest support to the rupee.

• Sovereign Debt & Credit Ratings - India’s sovereign credit rating outlook is negative, with the country at risk of losing its investment grade
rating. Standard & Poor’s and Fitch maintain a “negative” outlook on India’s “BBB-” ratings (in place since in April and June 2012, respectively),
highlighting fiscal challenges, the risk of erosion in the country’s external liquidity, and weakening outlook for the country’s growth potential that
reflects lagging advancements on the structural reforms required to boost business and private investment. Moody’s has assigned India an
equivalent long-term foreign currency rating of “Baa3” with a “stable” outlook.

• Economic Outlook & Growth - India’s economic performance remains subdued, challenged by limited fiscal room and still-subdued global demand
conditions. Output expanded by 4.5% y/y in the final quarter of 2012 compared with a 5.3% gain in the July September period, limiting the
overall economic expansion to 5.0% in 2012. Nevertheless, a gradual improvement is in sight; Market expects India’s real GDP to advance by
6¼% in 2013-14, though gains will continue to fall short of the close to 8% annual average recorded over the past 10 years. Consumer spending
growth remains muted relative to historical standards due to weak confidence, while investment is restrained by structural limitations, such as
poor infrastructure and a complex regulatory environment. Nonetheless, investment should be bolstered by the administration’s plan to speed up
the approval and implementation of large projects. In addition, monetary policy easing and implementation of economic reforms will improve
business sentiment. While the Indian economy is more domestically driven than many of its regional peers, net exports will continue to be a drag
on growth as import demand surpasses India’s shipments abroad.

• Inflation & Monetary Context - India suffers from persistently high inflation, though price pressures as measured by the whole sale price index
(WPI) have eased in recent months, measuring 6.8% y/y in February compared with 8.1% in September. Markets expect annual WPI inflation to
remain in the 6-7% range through 2014. Until recently, high inflation combined with India’s twin deficits had restricted the central bank’s ability
to implement meaningful monetary policy accommodation to counter subdued economic conditions and to encourage investment. Now, monetary
easing seems more viable on the back of a favourable trend in inflation, some promising economic reforms underway combined with a
reasonably prudent budget for the 2013-14 fiscal years. Market expects the Reserve Bank of India to loosen monetary conditions cautiously in
the coming quarters, after reducing the benchmark repo rate in January and March by a total of 50 basis points to 7.50%.


• Fiscal & Current Account Balance - India’s federal budget for fiscal year 2013-14 (April- March) targets a deficit of 4.8% of GDP, down from an
estimated 5.2% of GDP in the current fiscal year. While projecting a slight improvement in government finances, the budget can be classified as
pro-growth since expenditure will remain elevated in order to provide support to the economy. Nevertheless, the document is fairly prudent
considering the fact that general elections are due in 2014. At the general government level fiscal shortfalls remain substantially larger, above
8% of GDP through 2014. A continuously widening trade deficit will likely be more than offset by a solid performance in services exports and
stronger growth in remittances. Therefore, market expects a modest narrowing of the current account shortfall, with the gap averaging around
4⅔% of GDP through 2014.

• Financial Sector - The asset quality of Indian banks will likely remain under pressure in the coming quarters due to the relatively subdued
economic performance. Nevertheless, consumer loans continue to perform reasonably well on the back of solid employment conditions, with the
non-performing loans ratio at 3.4%, according to the International Monetary Fund. The banking sector’s Tier 1 ratio of slightly less than 10%
suggests sufficient capital adequacy. Indian banks’ capital levels are supported by the government’s stated commitment to a well-capitalized
financial sector.



ECB pulls the trigger: For the first time in almost a year, the ECB lowered interest rates, to a record low of 0.50%. The rates had been pegged at 0.75% since
July 2012. Market had expected the cut, as the Eurozone economy remains sluggish, and many of the major European economies have been bitten by
recession. However, the markets reacted negatively to comments by ECB head Mario Draghi that the ECB would consider a negative deposit rate for banks. The
deposit rate, which is what the ECB pays Eurozone banks for overnight deposits, currently stands at 0%. The euro was down more than one cent on Thursday
as a result. While the FOMC policy statement was a non-event on Wednesday, as the Fed basically noted that it wasn’t willing to take further steps, despite
weakness in the economy. This was a relatively hawkish statement from the Fed, which tends to be more dovish. Currently, the Fed is purchasing $85 billion in
assets under the QE program, and did not indicate any changes were coming. The Fed did take a shot at the government’s economic policy, saying that current
fiscal policy was restraining economic growth. Also the US has been struggling with weak releases since late March, so a couple of strong releases on Thursday
were welcome news. The trade deficit narrowed from $43.0 billion to $38.8 billion, easily beating the estimate of $42.1 billion. Unemployment Claims came in
below expectations for the second straight week. The key indicator dropped from 339 thousand to 324 thousand, blowing past the estimate of 346 thousand.
We’ll get a better picture of the US employment situation on Friday, as the US releases Non-Farm Payrolls and the Unemployment Rate. Meanwhile a loud sigh
of relief could be heard in the markets, as Italy announced earlier in the week that a government had been formed. Although the new coalition will have its
hands full with economic challenges, there was some good news this week from economic indicators. Italian 10-year bonds were down, dropping below 4%.
This is an important sign of renewed investor confidence in the Italian economy. There was further positive news as the Italian Monthly Unemployment Rate
nudged lower, from 11.6% to 11.5%. This beat the estimate of 11.7%. On Thursday, Italian Manufacturing PMI came in at 45.5 points, above the forecast of
44.9 points. If the markets see more good news out of the Eurozone’s third largest economy, the euro could push higher. German data looked sluggish last
week, and Tuesday’s numbers were mixed. Retail Sales declined 0.3%, below the estimate of 0.2%. Unemployment Change came in at 4 thousand new claims,
worse than the estimate of two thousand. On the bright side, Consumer Climate rose to 6.2 points, beating the estimate of 5.9 points. In order for the
Eurozone to stage a recovery, Germany’s weakness was an important factor in the ECB’s decision to cut rates, and the Eurozone will be unlikely to recover if
German numbers don’t improve.


Outlook: EURUSD look to trade under pressure as long trading below 1.3310 levels we can see prices testing 1.2660 levels. While EURINR look weak to test
68.80 level again one can take short in the range of 71.00-71.20 level with SL 72.20 for the target 68.80 level.



GBPUSD shot higher last month, as the pound gained about 250 points against the US dollar. The pound had a quiet week until Thursday, when the UK
released a better than expected GDP for Q1. This enabled the pound to post a rally late in the week. The markets were pleased as the key release climbed
0.3%, beating the estimate of 0.1%. As well, GDP rebounded nicely from Q4, which declined by 0.3%. GfK Consumer Confidence continues to look weak, as
the indicator posted a reading of -27 points. Net Lending to Individuals came in at 0.9 billion pounds, matching the forecast. M4 Money Supply declined 0.9%.
The estimate stood at 0.4%. Mortgage Approvals came in at 54 thousand, just above the estimate of 53 thousand. While Nationwide HPI declined by 0.1%,
surprising the markets which had expected a 0.3% gain. Manufacturing PMI rose to 49.8 points, easily beating the estimate of 48.6 points. MPC Member Ben
Broadbent spoke in London. Construction PMI was up sharply, hitting 49.4 points. The estimate stood at 48.1 points. GBP/USD was steady; as the pair was
trading at 1.5550. Market begins with resistance at 1.5875.

Outlook: Pound look to see a drop till 1.5420 levels which could be a good level to enter for the target of 1.5650 levels. While GBPINR look weak to test 83.20
level again as firmness rupee can create pressure but sustained above 83.00 level can test 85.20 level soon..







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