The Indian Rupee opened at 53.89 levels after closing at 53.84 levels on Friday. The intraday range for the rupee is seen between 53.65 - 53.95 levels. The holiday shortened trading week (3 days) will see markets positioning for rate cuts by the RBI in its policy review on the 30th of October 2012.
The market players are factoring in a 25bps repo rate cut. The rate cut expectations would have been higher if inflation for September 2012 had come in lower. Inflation came in at 7.81% for September 2012, up from 7.55% levels seen in August 2012. Inflation in September 2012 was the highest for calendar year 2012 to date. The Inflation was driven up by the fuel price hike made in September by the government.
The Asian market declined on Monday as risk sentiment was dented by lackluster earnings from leading U.S. companies, and a bigger than expected fall in exports from Japan.
The concerns about the outcome of this weekend's regional elections in Spain and disappointment in the lack of progress at this week's EU Leaders Summit have driven the euro lower against the U.S. dollar. It is currently trading above 1.30 levels.
The elections will be an important test of the people's satisfaction. If the People's Party holds onto all 38 seats, the Prime Minister would feel more confident to ask for a bailout, which would be positive for the euro. However if the party loses power, it would be a huge blow and could delay a bailout request putting further pressure on Euro.
The EU leaders took baby steps towards further integration at their Summit in Brussels. They pledged to agree on a framework for a banking supervisor by the end of the year with gradual implementation throughout the course of 2013. The European Central Bank has been given the task of overseeing the Single Supervisory Mechanism (SSM) in an effort to support Europe's debt ridden banks.
The US 10 year treasury Yield is trading stable at 1.77%. There has been lack of movement in U.S. Treasury despite broadly better risk appetite seen in global market since last few weeks. The Indian 10-year bond yield fell 1 bps to 8.13% after hitting a session low at 8.12%, it's lowest since Sept. 17. The Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) of the RBI tightened last week with bids for repo averaging Rs 87,000 crores on a daily basis against an average of Rs 61,000 crores seen in the week before last.
Outlook: Rupee has made a temporary short term bottom below 51.50 levels as we have been writing over few days. Our long term selling strategy has paid off since rupee has weakened in near term, hence exporters can use the recent weakness for covering spot. Importers for Oct to Nov (50%-100%) have already been covered almost. Exporters can sell above 53.50 levels only for long term. Rupee is expected to be in the range of 52.50 - 54 levels for next couple of months. Break of 54.30 on the upside would be crucial for USD/INR which will signal that the fall was to 51.40 was merely a short term correction. Rupee is holding weak despite dollar holding weak in the recent days in international markets.
(Source: Corporate Communications Team, India Forex Advisors Pvt. Ltd. )