Rupee may settle at 64 by Dec'13: Nirmal Bang

Nirmal Bang's updates on USDINR

The rupee has strengthened by almost ten percent from its all-time low of 68.80 made in late August. A host of factors supported this move, most importantly robust FCNR (B) inflows after the RBI launched a swap facility for banks on the same and prospects of an improved Current Account Deficit (CAD) number for Q2 FY14. Further, a reduced short-positioning in rupee in the Non-Deliverable Forward (NDF) market on the Fed’s decision to delay tapering of its asset purchase program (QE III) also lent a broader strength to emerging currencies. We believe that the USDINR pair is moving gradually towards its fair value and we see USDINR in a band of 60.50-63.50 in the short-term. However, it would be difficult for the pair to trade sub 60 in the absence of any significant domestic policy reforms. We see the USDINR ending the December quarter at 64.00 handle against the US dollar. Prospects of Q2 FY14 Current Account Deficit (CAD) to be sub $10 billion: India’s Q1 FY14 CAD stood at $21.8 billion, which was largely in line with expectations. However, CAD has improved significantly in Q2 FY14 against the backdrop of reduced gold imports and surge in exports. Merchandise trade deficit for the first two months in Q1 FY14 has averaged $12 billion. Initial estimates suggest that Q2 FY14 CAD could be sub $10 billion, which has given some comfort to the battered rupee, as well. Going ahead, we believe CAD could worsen in Q3 FY14 on the back of a surge in gold imports during the festive season. Moreover, the rise in exports can halt if the recovery in the euro zone falters again. RBI measures supporting rupee: The RBI’s dedicated dollar window for Oil Marketing Companies (OMCs) has removed upside pressure on USDINR. Moreover, the recently launched swap facilities for banks on FCNR deposits and banks overseas borrowing against Tier I capital have garnered decent inflows. As per the latest numbers released by the RBI, both these swap facilities have already attracted inflows of $3.6 billion. Although these swaps have more sentimental impact than the actual flow impact as this is done directly with the RBI rather than the market receiving these inflows, it will continue to provide support to the rupee in the short term until they expire in November. Reduced USDINR long-positioning in Non-Deliverable Forward (NDF) market: There is strong evidence that a massive long positioning in USDINR pair in the NDF market played its part in driving the onshore rate higher. The onshore rates followed the rise in NDFs during the recent meltdown. However, the pair looks more balanced in onshore market currently as it has not been influenced greatly by the movements in NDFs of late. Moreover, the fall in forwards also hints at reduced longs in the USDINR in the NDF market. Going ahead, the offshore market can again take the driving seat if there is any renewed pressure on EM currencies against the backdrop of the Fed tapering, which seems inevitable in the near future. 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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