Daily Market Commentary: Monday, September 10, 2012

Domestic and International Highlights:

The Indian Rupee opened stronger at 55.26 levels after closing at 55.39 levels on Friday. The Indian rupee is seen gaining in line with other Asian currencies which rallied as risk appetite returned to markets after the European Central Bank announced the bond-buying plan to help the euro zone economies. But shockingly the appreciation is so limited despite dollar getting so weak internationally. The intraday range for the rupee is expected between 55.20-55.45 levels.

After the ECB announcement of measures the Euro gained 1.9% against the USD last week. The global equity markets cheered the ECB news with strong gains. The US nonfarm payroll numbers disappointed markets with less than expected in August. The weaker than expected payroll gains are giving hopes of more bond purchases by the FED.

The market has entered a very crucial week with German judges, Dutch voters, IMF inspectors and Brussels regulators meeting on 12th to discuss on the ESM and European pact and the FOMC meeting on 12-13th September. The experts expect that the judges to let the European Stability Mechanism and a European fiscal discipline pact go ahead, but expect them to add more tough conditions for future bailouts.

Looking at the local fundamentals, the July's industrial output data will be released on September 12 and August headline inflation figure on September 14. These data's will further determine the RBI stance on rate cut. The concerns over slowing growth and high level of inflation in the economy will continue with the government expected to hike petrol, diesel, cooking gas and kerosene prices the coming week.

The 10 year Indian bond yield closed last week at 8.20% levels up from lows of 8.16% seen during the week. The Liquidity as measured by the bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI saw bids for repo averaging Rs 14,300 crores on a daily average basis against bids of Rs 47,800 crores seen in the week previous to last.

The Liquidity is expected to tighten as advance tax payments go out of the system in mid September but the tightness will be temporary, as the money will flow back into the system in the form of government spending. The government had auctioned Rs 16,000 crores of bonds last week.

Outlook: The Indian Rupee is still stuck in a range of 55 - 56 levels with a weaker bias. We expect a breakout anytime soon. Exporters still maintain covers near 55.80-56.00 levels as suggested and importers cover on any dips even at current levels. Overall range bound.

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