After weeks of steady appreciation, Indian rupee did a U-Turn against the US dollar, as broad based weakness in the emerging market basket and Asian basket of currencies against the American currency, spilled over into the local unit.
Indian rupee depreciated from 58.35/40 towards 59.20/21 levels and finally closed around 59.10/11 on spot. Over the past week, FIIs have preferred to buy Indian government debt over domestic equity and as a result of which we have seen inflows pick up in Goisecs, at the expense of equity markets. FIIs have poured in USD 5.7 billion over the month of May, out of which nearly USD 3.3 billion has been received in the debt segment. There is still USD 12 billion of unutilised limits available in the Govt debt paper market. Therefore, there is ample room of seeing further inflows incase the FIIs remains sanguine on the trajectory of long term yields in India.
Over the past week, economic data has been mixed from major economies of the world. News from US suggested that the US economy contracted by 1% in first quarter of 2014. In fact over the last few months we have written extensively about the blow back from inventory driven economic growth last year. We had warned that US economic growth will slow during first half of this year as companies run down their pad up inventory levels. A deeper analysis of the US growth composition suggests that inventory draw down nearly subtracted all of the growth that came from consumption spending. Net exports were also a drag on growth. On further slicing the consumption expenditure one realises that spending on healthcare primarily due to newly enacted Obama care program has added nearly a percent of annualised growth in the Q1. We expect to see an improvement in Q2 due to inventory accumulation and lack of weather related disruption but overall pattern of the US economy remains of a muddle through, with few quarters of strong growth interrupted by a quarter or two of weak growth.
Over the next week, there is possibility that rupee can correct further against the US Dollar and other currencies. We view the recent depreciation as a correction down move within a still structural upmove. As a result, a range of 58.60/80 and 59.20/30 and 59.60/85 on spot may be seen.
Anindya Banerjee, analyst, Kotak Securities