USDINR has stabilised around 76.50 and is wobbling in the 75.85-76.90 range for the past two weeks. There is a perceptible decline in Rupee weakening momentum which should be favorable to a trend reversal. FX market is working on truncated trading time and companies are not advising import payments except L/C payments due to lock down. USD inflows are better as compared to outflows and hence could have contributed to a steady Rupee. Once the lock down is lifted and import payments are advised, Rupee could probably wobble and hence Rupee’s trend reversal would await for lifting of lock down.
However, there are big positives for Rupee: 1) Price and import qty decline in Crude oil could reduce Indian trade deficit and shrink CAD to 0.5% of GDP this year with a possibility of CAD surplus also. 2) FII outflows could taper off as Equity markets have already declined significantly. 3) Global system is being flooded by Fed with USD. USD Liquidity will find its way into Indian markets and economy once the corona crisis abates. 4) Even if Crude price is to be climb again due to lifting of Global lock down, fund inflows may compensate for Crude outlows.
What are the negatives: 1) US is likely to hold China accountable for the unprecedented corona calamity and its disastrous economic impact. There are already voices calling for imposition of pandemic tariff on Chinese imports. There is also an opinion that US shoud not honor repayments related to Chinese investment in US Treasuries. This will be an extreme step as the trust on financial architecture will collapse leading to de globalisation and fresh trade and financial wars. However with US President seeking second term under the weight of Corona catastrophe, it could be politically appealing to impose either tariffs or reneging on Chinese investments. As Corona infection is contained in coming months, there could be fresh trade and financial tensions that could hurt markets . EM Currencies and hence Rupee could come under stress if US opts for tough measures against China. In that scenario,all predictions will be off the table.
So, what should be done: 1) Quick reaction to Global developments. However, market speed could be difficult to match. Hence, rearguard action should not be attempted. Considering the uncertainity in cash flows due to lock down, hedging should be strategised. All accounted imports should be covered on decline gradually with a strict stop loss above 77. If future inflows are certain or expected, cover the same through out of money USD Put option of strike 75.50. If option is difficult to implement , then cover 50% now and 50% on decline below 75.50, so that average could be above 76/76.25.
Gold: Will it shine in 2020-21:
Gold does well during periods of monetary easing and economic distress due to its safe haven status. Gold is trading at around USD 1745 and is maintaining stability around USD 1725/USD 1750. The scale of economic calamity has tilted investment to yellow metal. Fed and ECB will continue to talk and implement more monetary stimulus measures. Greater USD liquidity will chase Gold till economic recovery becomes entrenched.It looks like that Gold fundamentals have not been so positive for a long time. Gold has strong resistance at USD 1800 and upside break out will exacerbate the bullish momentum. Gold ETF is preferred both in SIP and Gold bond schemes.