Money Bol

The USD/INR retraced the highs of 45.28 and has settled at around 45.78 levels. Equity markets were directionless with the Sensex and the Nifty closing a tad lower than last week. The high point from the data point was the 11.3 % growth in IIP against expectation of 10%. Inflation for the month of December was 7.31% which was as per expectation. In Euro news, the ECB kept rates unchanged but reiterated the need for fiscal discipline from its member states. While we expect the USD/INR to be more weighed by foreign inflows and underlying strength of the Indian economy, momentary surges in the US dollars may take the pair back above 46 levels.

Market Trends

Major Indicators

Indicators	Current period	Prev. Period Value
GDP %	7.9% (30/09/2009)	7.7% (30/09/2008)
IIP %	11.7% (Nov-09)	10.3% (Oct-09)
Fiscal Deficit (Rs. Crore)	Rs.61146 (Nov-09)	Rs.47300 (Oct-09)
M3 Growth (%)	17.10% (01/01/10)	17.20% (18/12/09)
Forex Reserves (USD bn)	284.2 (08/01/10)	283.5 (01/01/10))
Inflation (%)	7.31 % (Dec-09)	4.78 % (Nov-09)
Credit Deposit Ratio (%)	70.84% (01/01/10)	70.51% (25/12/09)
Aggregate Deposits (Rs.)	Rs.4264540 (01/01/10)	Rs.4210745 (25/12/09)

Exchange Rates Major pairs	09-01-2010	16-01-10
EUR USD	1.4406/13	1.4384/90
GBP USD	1.6021/26	1.5962/61
USD JPY	92.64/67	90.74/80
USDINR	45.76/78	45.77/78
GBPINR	73.30/34	74.00/05
JPYINR	49.37/39	50.11/16
EURINR	65.94/96	65.45/50

Key International Indices and Commodities

Index	09-01-2010	16-01-10
Dow Jones	11618.19	10609.65
NASDAQ	2317.17	2287.99
SENSEX	17540.29	17554.30
NIFTY	5244.75	5252.20
FTSE	5534.24	5402.41
NIKKEI	10798.32	10982.10
GOLD	1138.25	1130.93
OIL	80.70	75.97

Market Developments

Global Outlook

• US Dollar finished the week on a strong note on the inherent weakness in the Euro area. On the data front it was a fairly disappointing week with a drop in Non-Farm Payrolls, continued fall in retail sales and a record US Federal Budget deficit. For now the US Dollar and mostly all currencies remain in tight range and lack of directions makes any forecast vulnerable. The coming week is expected to see housing stats and Initial Jobless Claims posing the major event risk.

• The EUR/USD traded in a tight band and overall fell during the week amidst worries of a strong dollar and other sovereign concerns. While the ECB kept rate unchanged, Prisident Trichet stated in no uncertain terms the underlying sovereign worries in the European Union. These sovereign concerns are posing a threat to the countries in the union. While countries like Germany and France have been quick  to show recovery, Greece and Ireland are reeling under their respective crisis. While the wider range of 1.4250 has still not been broken, a move to 1.4580 looks difficult.

• Gold currently trades at USD 1130 levels. Oil prices are hovering around USD 76.52 / barrel down from USD 80/ barrel and gaining demand is expected to keep prices upward biased. As the economy recovers commodities are expected to gain more strength in the coming months.

Domestic Outlook

• The domestic outlook looked set for further recovery with Industrial Production (IIP) posting a rise of 11.3% against expectations of 10%. Further, January has seen credit growth picking up to 13.2 % highest level for almost a year.

• Similar to last steep fall in October 2009, the steep fall in 2010 seems to be contained for now with the Rupee falling from the 45.28 low to current levels of 45.78. Equity flows are still strong and helped contain the retracement for the time being. Although at one side foreign flows continue to be strong, state bids and import demand would probably keep the pair in tight range for now. While major market participants expect levels of around 44.50 -45 around March, it remains to be seen how fast that happens. We expect this consolidation phase to last for some time.
• Inflation surged to 7.31% on the back of rise in food prices, making a CRR hike of around 50 basis imminent. With no major data expected for the week the focus in going to be on the month end policy review. We expect that the USD/INR could be seeing mixed impact from rate differential expectations on one hand and asset market impact on the other. On the whole though, equities remain as a strong direction provider for the INR and a range of 45.40-46 can be expected.

USD/INR (Last 3 Months)

Related posts:

1. USD/INR Downside Prevails
2. USD-INR Choppy and Uncertain
3. Currency Outlook – Fortnightly Currency Review November
4. Indian Economy – Annual Review and Analysis