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Will INR mayhem stop?

Abraham Lincoln rightly said, “ Every government should stand behind its currency, credit and the bank deposits of the nation. No individual should suffer any loss of money either through depreciation or inflation due to Bankruptcy.” But sadly, India is saddled with most of the problems mentioned by the late US president. Today India is facing ballooning NPAs, experiencing stoppage in lending by few nationalised banks, IDBI crisis, IL&FS crisis and most importantly, sudden depreciation of rupee in an election year, when government is targeting to control current account and fiscal deficit. INR depreciated from 70 to 73 against USD where as DXY fell from 97 to 94 in last 1 month. There has been no co-relation between INR & DXY since 14th August. It's purely domestic factors which are driving INR value. Traders may say that rise in crude oil price is one such reason but the fact is that crude oil made top of $75 on 3rd July and currently trading at $69. One can also argue that on crude import basket pricing of India which is linked to Brent crude. FIIs have poured abundant money at 66-67 range. If some of the FIIs have kept the position unhedged to save 4-4.3% of the annualised premium cost for USD hedging, then there are strong chances that that they might have run to cover after 70. Forward premium rose from 3.9% to 4.6% which indicates the story that exporters are not taking forward cover whereas importers have hedged to cover future higher payment risk. Whereas Bond Market is observing reverse carry phenomenon which is expected to get stabilised in coming 3 months, once RBI takes decision to hike the interest rates. Market has started discounting 50 basis hike by December 2018 which is pretty in line with inflation expectation and FED rate hike. FIIs will ultimately see that 8.5-8.6% yield is not bad at 75 INR level ,8% GDP growth,3.2-3.4% fiscal deficit and $400 billion reserve. Potential of earning high yield as well as capital appreciation might, lure FIIs again, to bond market. US & China trade war is making things worse for global trade & ultimately for the world economy. Uncertainty has increased tremendously in the recent past as global economy is gradually moving towards de-globalisation. ECB has signalled that it will end bond buying program from this year and will start rising interest rate from 2019 onwards. Dollar may spike in short term because of Trump rhetoric on trade balance but should start losing sheen in 1st half of next year as ECB starts raising interest rate coupled with impact of tariffs on US economy. INR may experience gradual strengthening to 68 after state and national political picture gets cleared. In addition to this, we might also witness RBI taking action on USDINR future trading and NRI deposits to balance forex remittance. It looks that still some heat is left which might take INR to 75-75.50 levels in coming 2-3 months. Exporter can cover risk with put options whereas importers should take forward cover or implement cost reduction strategy.

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