1st April 2019

Today INR market is closed (annual bank closing).

The Dollar continues to be strong as US yields recover from their lows. EUR is trading at 1.1225 and USDJPY is above 111, since risk aversion abated a bit on Friday and as the yield curve inversion stopped. But, the US bond market is clearly concerned about the US growth prospects and is very clearly pricing in a rate cut cycle to start sooner or later. The risk now is the scenario that the US economy continues to perform reasonably and the Fed is forced to stay put instead of cutting rates.

This week’s critical macro data includes the non-farm payroll release on Friday. With the focus now on the US economy, the other macro data points also assume more significance than usual. US retail sales, ISM etc. would all be watched for evidence of a slow-down. April 4th is RBI monetary policy and market expects a 25 bp rate cut.

On the domestic front, the Rupee market saw an upheaval in terms of a sharp rise in the cash/tom premium over the financial year-end. The cash spot reached as high as 46 paise as banks scampered to get out of excess USD they brought in to participate in the RBI auction. This is an unintended consequence of the auction and is actually opposite of what markets feared, that the auction would lead to a Dollar crunch. With elections just 11 days away and with the new financial year starting, the first few days could give a hint on the next leg of the INR move. The year-end moves in the cash/tom market makes one wonder if INR strength/stability was partially due to large USD liquidity, coupled with the need for INR liquidity, and if the new financial year could see INR catch up to other EM depreciation moves (such as ZAR, BRL, RUB and TRY) to some extent.

2nd April 2019

INR likely to open around 69.20

The Dollar continues to be strong, with EUR trading close to 1.12 and USDJPY at 111.30. Risk aversion receded in markets, and US equities finally posted 1%+ gain as the yield curve inversion reversed. US retail sales data came in much lower than expectations, and the GDP for this quarter surely would be affected negatively. While there is a temporary reprieve for markets, continued weakness in macro data could again re-ignite concerns of growth. In line with risk rally, Brent is trading close to 69.50.

The RBI has announced another 5 billion 3 year FX swap auction, to be conducted on 23rd April. It is now clear that this method would be frequently used as a liquidity management tool. Forward premia would continue to be suppressed and be less than the interest rate differential, thus leading to low cost of long term hedging and even an arbitrage for those who can fund cheap USD. Corporates can explore a fully hedged Dollar funding as a cheaper option vis-à-vis an alternative INR funding for that maturity. The FX swap is spot neutral per se, but if expected USD flows into the country don’t materialise, Dollar shortage can eventually impact the spot to an extent. Given the current expectations of flows though, impact on the spot would be minimal.

The next important event is the RBI monetary policy on April 4th. INR continues to be range bound for now, but given the elections and Brent move towards 70, a sharp Rupee appreciation move is a bit improbable.

3rd April 2019

INR likely to open around 68.90

Yesterday was a fairly quiet day for the Dollar as US yields also paused from the sharp up-move. EUR is trading around 1.12 amid slowing EU growth concerns, and USDJPY is at 111.40. AUD sharply fell and recovered somewhat to trade around 0.71 after dovish RBA policy. GBP is flat at 1.3130. Brent is slowly inching up towards 70.

USDINR drifted lower after opening higher, to close around 69 levels. The RBI’s FX swap auction usage is expected to boost debt inflows in the form of fresh ECBs by Indian corporates and NBFCs, as hedge costs have fallen significantly. 1y premium has come down to 255 paise level, and the 3y MIFOR is below 6% after a long time. A fully hedged ECB is cheaper now than the alternate INR loan, and this seems to be one of the objectives of the RBI in using FX swap instead of OMOs for liquidity management.

It is now a tug-of-war between favourable flows situation on one hand and the potential for risk aversion due to slowdown fears on the other hand, with elections adding to the volatility.

4th April 2019

INR likely to open around 68.45

The Rupee saw a large gain as flows continued and on some PSU bid announcement for their USD bond inflows. The market is clearly one-sided in its positioning and expects continued INR strength and in this environment, a flow of reasonable size can move the market lower. INR ended around 68.50/55 level yesterday. In the monetary policy today, the MPC  is expected to cut rates by 25 bp and also change the stance to accommodative.

The Dollar is flat globally, and yields have been retracing some of their post-FOMC fall EUR is trading at 1.1240 and USDJPY at 111.40. Increasing US yields signal that slowdown fears are abating a bit, and this is one of the reasons for INR strength. But the US data continues to be weak, and it is a matter of time before slowdown fears come back to the fore again. In the immediate term, barring some unexpected election volatility, INR is in a safe zone.

5th April 2019

INR likely to open around 69

The RBI policy was more or less on the expected lines. The repo and reverse repo rates were cut by 25 bp, but the stance was not changed from neutral to accommodative. GDP forecast for FY 20 has been slashed to 7.2% (7.4% previously) and inflation is also projected to be lower than previous estimates, reaching 3.8% by the end of FY 20. INR reacted negatively to the policy, probably due to a bit of profit taking after the event and may be due to some disappointment that the policy stance continues to be neutral.

The Dollar is holding firm, with EUR at 1.1225 and JPY a bit weaker at 111.70. Comments from Xi that there is significant progress on trade talks helped optimism and some risk appetite. Today’s US jobs data is to be watched for the near term movement in the Dollar. While the ADP payroll was lower than expected, yesterday’s jobless claims were the lowest in a long time, fuelling market hopes of a good jobs print today. Brent jumped to touch 70 but has given up gains in today’s session, now trading at 69.20.

The range of 68.25 to 69.50 seems to be the new range for INR in the short term. While flow expectations continue to fuel INR strength, excessive market positioning for INR strength can lead to sharp reversals on some days of negative news/events and one can expect some volatility within the broad range to continue into the elections.