INR Outlook..

INR depreciated sharply in the last few weeks and INR spot even touched 49.88 intra-day. Lot of market players were caught off guard with this sharp down move. More than fundamental factors, sharp move had to do more with technical factors. Across the board there was EM currencies long unwinding. Importers and FII’s had unhedged positions in INR and this up-move led to panic among participants. Exporters had already sold off large part of their USD earnings at 45-46 levels, so there was no USD selling at higher levels. It took dollar selling by RBI at 49.8 levels to arrest the sharp slide. Although intervention by RBI was not large (closer to USD 500 m), but it had sentimental impact and Rupee recovered to 48.9 levels.

In the short-term, everything depends on Euro-zone resolution. INR is taking cues from Euro movement. I am not very optimistic on Euro zone resolution. It’s a case of economies having slow or zero growth with high debt levels. But once panic settles down, INR should provide good returns. I will slowly start building positions in Indian currency. If there is capitulation over Euro crises, Rupee can go below March 2009 lows of 52-53. It will be dream levels to go long into Indian currency. If there is capitulation, then commodities along with all asset classes will go down substantially. This will help bring down inflation concerns and pause by RBI, may be cut in interest rates later next year. This will build good case for Indian equities and INR in turn.


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