Daily Market Commentary: Wednesday, August 1, 2012

Domestic and International Highlights: The Indian Rupee opened weaker at 55.74 levels after closing yesterday at 55.65 levels against the dollar. The Asian peers are trading negative as China’s manufacturing expanded at the slowest pace in eight months. The Intraday range for the rupee is expected betwee55.30 -55.70 levels.

The Central bank had tried hard to control the inflation. Expressing concerns about the slowing growth, in its monetary policy review RBI kept the interest rate unchanged but threw in a surprise by cutting the statutory liquidity ratio from 24% to 23%. The RBI also maintained that the main focus of the policy would be inflation, as it has increased the inflation forecast from the current 6.5% to 7%.

On a positive note, the central bank separately said it will allow companies to keep all of their foreign exchange earnings while also easing restrictions on forwards contracts. It seems RBI has accepted a weak rupee , high inflation and lower growth as a new normal and letting market run its own course.

The US Treasury yields are trading lower at 1.47% ahead of FOMC policy announcement as market participants speculate on the probability of further easing. We expect no new stimulus to be announced by FED. The US dollar is lower against most of its counterparts after mixed economic data.

The Euro is trading strong before this week's ECB meeting. Markets appear optimistic after the ECB President Draghi statement and they expect that he will back his comments that he will do whatever it takes to preserve the euro.

The FED will conclude a two day policy meet today, followed by ECB meet on Thursday. Nothing major outcome is expected from both the events.

The Indian 10-year bond yield rose by 8 bps at 8.23 percent from its previous close, after the central bank cut the proportion of government debt lenders must hold, while also raising its inflation outlook. The 10-year yield falls from a session high of 8.28.

Outlook: USD/INR maintains bullish bias for 3-4 months targeting 56 levels as first target. Importers still cover on dips like yesterday and exporters wait till 56 to cover.

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