For most part of last week, Indian rupee was caught within a tight range of 59.10/20 and 59.40 on spot. Lack of triggers, domestic and foreign, kept the pair bracketed. Monsoon worries on one hand and promise of future growth on the other, gave little to chew for the large traders.
However, situation changed quite drastically last Friday, when rising tensions in Iraq, where near civil war situation prevails, caused oil prices to reach 9-month high. Higher oil prices and fear of contagion in Middle East, caused a sell-off across the global markets, starting with Asia and then emerging markets.
Indian stock markets dropped nearly 1.5% with high beta stocks falling between 5-10%. Indian rupee could not hold its ground either, as large buy orders were triggered once Indian rupee traded above 59.50 against the US dollar levels on spot. The pair traded all the way up to 59.78/80 levels, before settling around 59.74/75 levels on spot. Large option sellers were heard to have been buyers of futures/forwards, as many of them were caught on the wrong side of the Gamma Trade. Globally US dollar was bid, as the pair gained against almost all major currencies.
Indian economic data was better than expected as industrial production data for April showed some promise and retail inflation ticked lower.
WHAT TO WATCH: Going ahead, investors will keep a close eye on the Indian government's effort at following:
(i) tackling stressed assets in banking sector
(ii) policies that help in effective and transparent governance
(iii) financial sector policies
(iv) efforts to kick start investment cycle
(v) change of the quality of fiscal expenditure to make it more capital generating than demand augmenting, which in turn will be disinflationary
(vi) progress of the monsoon.
In global markets, we need to keep an eye on oil prices, which remains hostage to developments in Iraq. An escalation in hostilities can cause spike in oil prices, which then will be a short term negative for the Indian Rupee. Next week, in the global economy a number of key economic events are scheduled and we need to keep an eye on them:
(i) US industrial production data and business sentiment surveys
(ii) US housing data
(iii) US central bank's monetary policy
(iv) German business sentiment survey
(v) minutes of Bank of England's last monetary policy.
OUTLOOK: Over the next week, Indian rupee against the US dollar is expected to face strong resistance around the 59.80/60.00 region, which in case it is crossed, if geopolitics warrants, can cause prices to move towards 60.40/60 region. We can see RBI come in the selling side - in case rupee comes under a spiralling pressure. However, we do not expect the current bout of depreciation to sustain for long because domestic tailwinds, will make rupee attractive for foreign investors and exporters above 60.00 handle on spot. Key support is expected around 59.35/40 region and then around 58.80/90 region.
By Anindya Banerjee, analyst, Kotak Securities