Daily Market Commentary: Friday, September 14, 2012

Domestic and International Highlights:

After the long speculation over QE3, the FED has finally announced it. The Fed has announced an open-ended QE3 focused on MBS purchases and extended its conditional commitment to leave its policy rate at near-zero until mid-2015.

The $40bn of MBS purchases per month is a bit smaller than we would have expected, since that works out at only $480bn per year. But the Fed pledged to continue those purchases until the outlook for the labor market improves substantially.

If we assume that it means until the unemployment rate gets down to 7% and that the Fed's new forecasts will show the unemployment rate won't get down to that level until sometime in 2015 then the Fed has effectively pledged to buy $40bn of MBS for three years.

Looking at the Indian Rupee, it opened strong at 54.90 levels against the dollar. Yesterday it closed weaker at 55.43 levels against the dollar. The intra day range for the rupee is expected between 54.60-55.10 levels.

The Asian markets rose to a four-month high, after the FED said it will buy mortgage-backed securities to bolster economic growth.

The Fed's move will likely accelerate the risk-positive momentum at work since the European Central Bank's bond-buying scheme to get borrowing costs down for Euro zone members was approved by Germany's constitutional court.

With Europe getting their act together, the Fed flooding the market with cash and China talking stimulatory infrastructure projects, the three largest influences of market dynamics could create a rally in the global markets for the near term. The dollar index measured against a basket of key currencies drifted near a four-month low of 79.18 levels.

Domestically, the government raised the price of heavily subsidized diesel on Thursday to harness its fiscal deficit and counter the threat of becoming the first of the big emerging economies to be downgraded to junk.

The higher diesel prices threats to higher inflation in the short term, but the central bank has been clear it wants the government to slash the fiscal deficit before it will tackle rates. The central bank holds a monetary policy meeting on 17th September and is expected to hold the interest rate.

The cabinet's economic panel is due to meet on Friday to discuss a plan to invite foreign airlines to invest in domestic carriers and a proposal to sell shares of large state-run firms. The Inflation data for the month of August is also due for the day.

Outlook: The Indian Rupee has broken the range of 55-56 finally. The news of QE3 can make Rupee get bullish in the short term but the medium term outlook still remains bearish. Importers Plan A is to hold till rupee is appreciating , Plan B to keep stop loss of 55.20 in case rupee turns anytime.

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