Currency Map:

WT1 Crude: USD 60.20.

Nifty: 11620, up 7% m/m.

Rupee gained 2.23% to close March 2019 at 69.16 vs 70.74 on Feb end. Rupee traded in the 68.30-71 range, impacted positively by huge FII inflows. Euro/INR tracked USD/INR movement and ended 3.57% lower. GBP was volatile due to Brexit vote.

For the fiscal year, Rupee declined almost 4 Rs y/y to close at 69.16 as against 65.17 on March end 2018. Rupee declined steeply to hit 74.40 in Oct and has significantly gained in the last 5 months. FII outflows in first half of the fiscal, along with high trade deficit due to Crude prices and increase in US interest rates till Dec 2018 weighed on EM Currencies and Rupee. However, Fed’s shift to neutral position and ECB’S dovish stance have tilted odds in favour of riskier assets. Flows into EM markets increased in the last 2 months and was able to neutralise Crude price rally. Rupee also wobbled in Feb following terror attacks and Indian counter action. However, the impact was short lived and inflows helped Rupee to gain. RBI cut rates in Feb and has since then indicated dovish stance. RBI is expected to cut rates again in April as real interest rates remain high. Inflation is running below RBI’S projection of 2.8% for H1 of new fiscal, leaving space for rate cuts. High frequency indicators are indicating slow down in GDP growth as Govt plans to slash capital expenditure to control fiscal deficit. Direct tax collections have fallen short, though disinvestment targets have exceeded projection. However, the gap/ shortfall can be bridged only through slash in capex. This could lead to slow down in growth. RBI will have an easy choice on interest rate path due to slowing growth and lower than projected inflation.

RBI injected liquidity by undertaking 3 year USD buy/sell swap for USD 5 bn instead of conventional OMO . This has helped fwd premia to ease from 4% to 3.65% annualised. In another significant move, RBI reinstated byer’s credit arrangement which was scrapped in March last year. RBI has also allowed 6 banks to move out of PCA mode. These measures are likely to boost credit, reduce interest cost and bring down hedging cost.

Equity indices climbed significantly in March. Banking stocks contributed to sensex and Nifty gains. Nifty climbed 7% m/m. WTI Crude climbed further in March, as OPEC decided to extend production cuts till June end.

FII’S invested  Rs 33116 Cr in Indian Equities in March. FII’S have nett bought Rs 47195 Cr of Indian Equities in this calendar Year till date. FII’S have invested Rs 15351 Cr of Indian debt securities in March. FII’S have nett bought Rs 3460 Cr of Indian debt in this calendar year till date. FII’S have nett invested Rs 9685 Cr in Equities in 2018-19 fiscal, with most of the investment coming in Feb and March 2019. FII’S have nett sold Rs 45892 Cr in debt papers in 2018-19 fiscal.

Global markets were dominated by US-China trade issues, Crude prices, shift in central banks monetary stance and uncertainty over Brexit. US has indicated that tariff on Chinese products will remain for extended period of time till satisfactory compliance of a comprehensive trade deal encompassing technology transfers and access to Chinese markets. IMF, World bank and OECD have slashed Global economic growth due to slow down in EU, Chinese economies and effects of trade issues. EU growth is likely to be under 1% and US could slow down to 2.3% in 2019 from last year growth of 2.9%. China could clock 6% growth rate.

In recent weeks, there is an intense debate on US Yield curve inversion which has been a lead indicator of recession. Fed members have shrugged off recessionary fears. However, there is a growing expectation that yield curve now implies possible US rate cut than 1 more rate hike projected by Fed in 2020.

Softer US interest rates could augment FII inflows into Indian asset markets. This will help Rupee to gain/trade in the 67-71 range. The only negative factor is the fear on fiscal deficit front.

Currency outlook: Fed’s move and ECB’S growth outlook should help EM Currencies and enable more flows into Indian markets. This should balance trade deficit, even if Crude climbs further. In the last 2 months, WT I Crude has edged higher and has rallied over USD 60/bbl. Oil prices and election uncertainty are the counterbalancing factors to Fed and ECB’S dovish stance. Hence, once the election uncertainty is over, Rupee has higher probability of gains to 68/67 levels. For the next few months, expect Rupee consolidation in the 68.30-70.50 Zone. Since EUR/USD is not exhibiting any decisive trend, expect EUR/INR to track USD/INR and trade in the 77-79.50 zone. GBP/INR movement will be impacted by Brexit developments.

Over the medium term, Rupee positives are 1)Dovish Fed, 2) Weak EU growth, 3)Positive resolution to US – China trade talks. 4) Investment flows. Rupee negatives are 1) Crude rally, 2) Election result uncertainty.

Considering the last year Rupee decline and the overall spot movement not matching the fwd curve over 3 year period, it is a worthwhile proposition to sell USD for 2 years and sell  USD for 1 year on rally to 70.50.                                                                                   

EURINR exports can also be fwd hedged as EUR/USD is likely to consolidate at an average level of 1.13 this Year due to status quo on interest rate differential. Hence, any short term Rupee weakness could help EURINR to climb to 80 levels and that would make a strong and confident case for 2 Year export hedging.

GBPINR is in whipsaw mode, anticipating Brexit resolution. Expect 90-93 range in coming weeks.

JPYINR could consolidate in the 61.50-63.50 range.

Upcoming events:

1) RBI policy

2) UK Vote on Brexit deal

Outlook for April: USDINR has support at 68.30 and resistance could emerge at 69.70/70.50 on rally. EURINR rally is due to USDINR rise. Expect 77.50-79.50 range. GBPINR is expected to trade in the 90-93.50 range. JPYINR is expected to trade in the 61.50-63.50 zone.

Suggestion: USD exports be hedged on rally to 69.70/70.50, EURINR exports be hedged on rally to 78.50/79.50 levels. GBPINR exports be hedged due to BREXIT uncertainty.