Daily Market Commentary: Thursday, August 16, 2012

Domestic and International Highlights:

The Indian Rupee opened at 56.00 levels after closing at 55.65/66 against the dollar on Tuesday. The intra day range for the rupee will be 55.75-56.20.

The Indian rupee was seen weakening on Tuesday to its lowest in more than a week after a rise in July core inflation while a widening trade deficit highlighted added to the depreciation of the rupee. The Core inflation was estimated to have risen 5.44% in July from 4.9% in June. Although inflation moderated to 6.87% in July from 7.25% in June, food inflation was still ruling above 10%.

The hopes for rate cuts that would revive an economy growing at its slowest in nearly a decade were also dented after Reserve Bank of India Governor Subbarao on Monday warned inflation remained too high for comfort.

The slowdown in the US and Europe has resulted a decline in July's exports. It contracted by 14.8% steepest fall in last three years to USD 22.4 billion making it difficult for the country to achieve the target of USD 350 billion this fiscal.

The current account deficit remains a particular source of concern, data showed the trade deficit widened to $15.5 billion in July from $10.1 billion a month earlier. India is facing a risk of down grade of credit which could be junk if it fails controls its fiscal deficit.

The market expectations on Fed easing have been reflected in higher U.S. yields. It is currently trading higher at 1.84% after touching the record low of 1.38% in the July. The lack of news in the euro area, as key European decisions lie ahead could change the course of US treasury yield.

The Indian bonds fell on Tuesday after a rise in July core inflation dented expectations for an interest rate cut after the headline wholesale prices index unexpectedly fell to a near three-year low. The India's benchmark 10-year bond yield rose 2 bps to 8.22% from its previous. It traded in the range of 8.12 to 8.24% in the day. Weak industrial output and very poor exports suggest that there is rate cut scope but delayed monsoon affect on food prices has also to be taken in consideration.

Outlook: Exporters may start covering above 56 levels partially (Plan A). Exporters keep a stop loss of 55.40 (Plan B) in case rupee keeps appreciating to cover partially. Trend stays USD/INR pair bullish Target 56.50

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