Daily Market Commentary: Tuesday, August 28, 2012

Domestic and International Highlights:

The Indian Rupee opened weaker at 55.80 levels against the dollar. The rupee closed weaker yesterday at 55.69 levels. The Intraday range for the rupee is expected between 55.70 - 56.20 levels.

The Indian GDP figure is due to report April-June on Friday. The growth figures will be keenly watched by the market as the growth forecast have been reduced by local and International agencies for the fiscal year ending in March to a decade low of around 5.5%.

The Global risk factors will also be key, with investors keeping a close eye on Euro zone developments and to Federal Reserve Chairman Ben Bernanke's speech at Jackson Hole on Friday. The Asian peers are trading lower on account of the Japan cuts its economic assessment in August , first downgrade since October 2011.

The Indian government efforts to revive the growth is continuing in vain. Poor monsoon, opposition from political parties are acting as a hurdle in the government's plan. There has been some pickup in a monsoon, but the deficit still persists as the cumulative rainfall during June 1 to August 22 now stands at 14% below normal level.

Roughly 26% of India's total area are affected by moderate drought. The poor monsoon will keep the inflation at elevating levels increasing the pressure on the central bank to hold the interest rates. On the other hand the Finance Minister efforts to support growth and reduce the fiscal deficit would be on edge if he is not successful in reducing deficit, increasing prices or reducing subsidies.

The Euro drifted below 1.25 levels on account of weak data and concern after the comments from central bank chief Jens Weidmann pointing to the mounting unease in Germany with the policies being used to combat the three-year old debt crisis. The Greek Prime Minister Antonis Samaras made a plea for politicians to not to talk up the possibility of a Greek Euro exit. The market players are expecting that the ECB will be considering setting yield band targets under the new bond-buying program.

The US 10 year treasury yield is trading lower at 1.64% (seen declining again). The Indian 10-year bond yield falls 2 bps to 8.19% on expectations April-June economic growth data due on Friday will be lower than 5% increasing pressure on the RBI to cut rates in mid-September. The call money closed at 8.00 - 8.05 marginally up from Friday's close of 7.95 - 8.00 %.

Outlook:The Indian Rupee is in a range of 55 - 56 levels. Exporters still maintain covers near 56 levels as suggested and importers near 55.20-55.40 levels. The pair still stays USD/INR bullish target 56.00. Chart patterns show a major breakout is expected soon in USD/INR. Breaking of 56.20 in USD/INR will be quite bullish for the pair again. (It is to be noted that rupee did not appreciate in the same manner as the dollar weakened against the Euro and pound internationally signalling weakness in rupee.)

(Source; Corporate Communications Team, India Forex Advisors Pvt. Ltd)