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Dec 09, 2012, 01.02 PM IST | Source: Moneycontrol.com

Rupee corner: A sharp decline on FDI impasse; may test 53

Sharekhan has come out with its report on currencies. The rupee can appreciate to 53.00 levels as the much-awaited FDI reforms were finally approved by the Parliament. However, uncertainty in the European Union (EU) and the USA may see the rupee testing 55.30 levels.

Sharekhan has come out with its report on currencies.

Key points:

  • Goldman Sachs upgrades India to overweight _ India’s current account deficit (CAD) to narrow to 3.5%, says PM’s Economic Council
  • Japanese lower house dissolved for December 16 election
  • EU finalises Greek deal; Catalonia seeks independence from Spain
  • Economic and political rift between Germany and other euro nations widened
  • The US Fed discussed use of numerical threshold and extension of QE3
  • UPA II wins FDI battle in both houses 
INR-USD: The rupee fell to a three-month low before erasing most of its losses on hopes that foreign direct investment (FDI) reforms will be approved during the winter session of Parliament. The weakness in the rupee was mainly due to the rising CAD and fiscal deficit, which are expected to correct if FDI reforms are implemented. Adding to the weakness were the better performing US economy and fiscal cliff concerns that pushed the dollar higher against the rupee. A sharp fall in the rupee was arrested as various political parties showed support for the United Progressive Alliance-II government, thereby erasing the worries of parliamentary logjam to some extent. The Q2FY2013 gross domestic product (GDP) growth came at a low 5.3% while the Reserve Bank of India has maintained its anti-inflationary stance. The rupee can appreciate to 53.00 levels as the much-awaited FDI reforms were finally approved by the Parliament. However, uncertainty in the European Union (EU) and the USA may see the rupee testing 55.30 levels.

INR-GBP: The GBP-USD traded in a narrow range of 1.58 to 1.60 as better than expected economic data and a sluggish outlook given by Bank of England (BoE) confused markets. The UK's GDP contracted 0.1% YoY in Q3CY2012, following a 0.5% fall in the prior quarter. BoE downgraded the country's economic forecasts and suggested that growth will be "weaker for longer". The central bank anticipates annual GDP to expand by 2% in two years. Policy makers have questioned the effectiveness of the asset purchase programme, which provided some respite to the pound. However, escalation of fiscal cliff worries in the USA can see the GBP/USD falling to 1.57 levels. We see the GBP-INR trading in a range of Rs85.40- 88.50.

INR-EUR: The EUR/USD pair has defied the weak European Union fundamentals to rally above 1.3 levels. The European Central Bank (ECB)’s and European Union (EU) politicos’ repeated rhetoric to save the euro has somehow supported the single currency. The debt problems in Greece, Spain and Italy continue to linger. Moreover, the ECB’s OMT has distorted the bond markets as yields fail to provide a clear picture of the sovereign economic health. We do not see any significant improvement in the underlying fundamentals and the single currency will see a sharp fall once the market ignores the benchmark sovereign yields, which have been capped by the ECB’s nonoperational OMT. The Eur-INR pair is likely to trade between Rs68.70 and Rs71.90.

INR-JPY: The yen weakened by 3.3% against the greenback as investors speculated Bank of Japan (BoJ) would implement easing more aggressively, especially if the opposition party, the LDP, wins the election. The LDP head suggested that BoJ should pursue unlimited easing until headline inflation hits 2-3% level. On the other hand, Japan’s weak economic data and strong performance from the USA account for further weakness in the yen. It remains to be seen if LDP will win election in December and initiate open-ended quantitative easing. We expect the USD/JPY to trade in the 83 -80 range in the short term. We see the JPY-INR in a range of 64.30 to 67.30.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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