Daily Market Commentary: Thursday, September 13, 2012

Domestic and International Highlights:

The Indian Rupee opened at 55.29 levels after closing yesterday at 55.21 levels. The gains remain limited on account of increasing political instability and poor pace of reforms in the nation. The intra day range for the rupee is seen between 55.25-55.60 levels.

The Asian peers are trading mixed ahead of the U.S. Federal Reserve's decision later in the day, but investors continue to remain optimistic of further stimulus action to support the world's largest economy.

In Europe, Germany's Federal Constitutional Court yesterday cleared the way for ratification of a regional bailout fund. Nonetheless, it has placed a ?190bn cap on German liabilities, and for additional guarantees further approval of German Parliament is to be taken. The ECB has promised to also buy the bonds of any country that asks the EFSF or ESM for support. Nobody knows how much the Bank will purchase as they haven't disclosed any details on it.

The Euro rose to a four-month high after the German court ruling, even as it came with conditions. After the key events in Europe all eyes now is shifted to the FOMC policy decision which will be announced later in the day.

Domestically, after the IIP figures the focus would be on the July inflation data due on Friday. Wholesale prices are expected to have risen 6.95% year-on-year in August, slightly higher than July's 6.87%. The Reserve Bank of India is expected to keep interest rates on hold unless inflation cools down.

The data released by RBI showed that Central bank had sold USD 785 million and did not buy any dollars in July, compared with net sales of USD 50 million in the previous month. The selling of dollar by RBI was also seen supporting the rupee.

On the other hand NRI deposit was also seen reducing; it fell to $822 million in July, from $1.7 billion in June and $2.8 billion in May. The highest NRI deposit inflows were seen in May when the central bank announced measures to bolster foreign currency inflows after the rupee fell sharply.

The US 10 year treasury yield is trading higher at 1.75%. The Indian bond yields rose on Wednesday on growing caution ahead of the inflation report. The 10-year bond yield rose 2 bps to 8.20%. The Investors are also looking at whether the government will finally act on reforms. The Fiscal reforms are seen as critical to prevent the government from overshooting its 5.1% fiscal deficit projected for the year, which would steeply increase the chances of a downgrade into sub-investment grade

Outlook: The Indian Rupee is still stuck in a range of 55 - 56 levels with a weaker bias. The news over QE3 seems to be priced in the market, if nothing concrete is announced after the FED FOMC meet today we could see market drifting lower and Dollar Index bouncing back. We expect Rupee to get slightly bullish in the very short term but the medium term outlook still remains bearish. Overall range bound.

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