Sell USD-INR

Wanted to recommend a sell on USD-INR (to be executed before U.S. Fed’s expected announcement on Quantitative Easing on Nov 3) based on the below fundamentals.

RBI’s policy stance in Second Quarter Review of the Monetary Policy for 2010-11 released earlier today.

• 1. RBI’s concerns on inflation “32…. the current rate of inflation is still well above the comfort zone of the Reserve Bank.”
• 2. RBI’s confidence in growth “45…. First, the domestic economy is on a strong footing. The 8.8 per cent GDP growth for Q1 of 2010-11 suggests that the economy is steadily regaining the pre-crisis growth trajectory”
• 3. Not too much concern with recent rise in Rupee because the currency of competitor export countries has also increased in the same period. “26. Since the 36-currency REER includes the currencies of many countries which are India’s direct competitors in the global market, it is a better reflection of the impact of global exchange rate movements on competitiveness. The relatively small appreciation in this index reflects the fact that many competing countries have also seen their currencies appreciate during this period. From this perspective, the impact of the recent nominal appreciation of the rupee may not have a significant implication for competitiveness”

Bottomline: RBI’s main concern is to tame high inflation. This puts upward pressure on Rupee to get imports cheaper. Good growth numbers allow for room to let the rupee appreciate (& let your exports suffer for a while)

Expected Impact of Fed expected announcement on QE2

• 1. Dollar likely to fall (in general against a basket of currencies) due to lower U.S. interest rates.
• 2. Interest rate differential w.r.t. India will further increase. (Remember RBI raised policy rates today). So more FII inflow expected into India - putting upward pressure on Rupee.
• 3. Commodities expected to rise. This further increases inflationary pressure on India. A higher Rupee helps to buy the commodities cheaply.

Bottomline: Lower dollar, higher FII in India and higher commodities all support a higher Rupee (vs. USD).

Risks:

• 1. QE2 amount turns out to be below market expectations.