EUR-INR futures to decline further

Financial markets continued to be buffeted by the sovereign debt issue in Greece and other European economies. The hike in reserve requirement by People's Bank of China towards the end of last week only added to this turbulence. The rupee was, however, resilient and strengthened to 46.1 against the dollar. Strong industrial production numbers and expectation of major policy changes in the upcoming Union Budget coupled with stability in equity market contributed to the rupee's strength.

Dollar-Rupee outlook

The rupee appears to have finished a 3-wave down-move from the January 12 peak to the recent low at 46.8. It can now strengthen towards 45.8 or even 45.2 in the weeks ahead. The trend for the next month or two can be sideways between 45 and 47.8.

The long-term trend in rupee is up since last March. As we have been reiterating, unless there is a close below 47.6, the rupee can strengthen to 45 or 44 over the medium-term.

USD-INR futures

USD-INR future could not make any headway beyond the February 8 peak of 46.9 and declined to 46.1. As indicated in our last column, decline below 46.5 has turned the short-term trend downward. Immediate downward targets for this future are 46 and 45.9. Traders can initiate fresh long positions on a bounce from the zone between 45.9 and 46 with stop at 45.8. A rebound from here can take this future higher to 46.45 or 46.65.

Fresh long positions should, however be avoided on a close below 45.9, since that would imply that the decline would get deeper to 45.3.

EUR-INR futures

We had recommended fresh shorts in this currency future only on a close below 63.7. The EUR-INR future traded on MCX-SX closed below this level on February 15 and went on to the low of 62.7 on Tuesday. The trend in the underlying continues to be extremely weak despite the bounce in the last session.

Traders can hold their short positions with stop at 63.7. This currency pair can decline 1.5 to 2 per cent over the ensuing weeks.

GBP-INR futures

This currency future moved sideways between 71.7 and 73.4 on the MCX-SX over the past week. Since this sideways movement is observed after a strong down-trend, traders can play short in these futures with stop at 73.5. The short-term target for this pair is 71.8 and traders should watch out for sharp bounce from the zone between 71.6 and 71.8.

JPY-INR futures

JPY-INR futures declined from the peak of 52.5 to the low of 51.3 on Tuesday. Immediate support for this pair is at 51.1. Fresh shorts are suggested only on a decline below this level with the subsequent targets of 50.7 and 50.3.

Exporters hit by exchange rate volatility

Exporters are in trouble again, according to a Federation of Indian Chambers of Commerce and Industry (FICCI) survey on exports.

The chamber states that concern and uneasiness are back among exporters due to the variation in exchange rates.

Concerns are also mounting because of the evolving situation in the euro zone which is resulting in a risk of slowdown in exports to that region.

The survey, which was conducted in April and May 2010, saw participation from 278 companies with a wide geographical and sectoral spread. The turnover of the companies that participated in the survey ranged from Rs 1 crore to Rs 1,40,000 crore.

The survey reveals that large sideways movement in the value of the rupee against the US dollar and euro has led to severe problems.

“While the sudden appreciation in the value of the rupee affected the margins adversely as it led to lower realisation for exporters, the recent decline in the value of rupee caught exporters off guard and they lost on account of forward contracts that were booked to hedge currency risk,” stated the FICCI survey.

Measures taken

FICCI says exporters are taking various measures to counter the currency fluctuation. Dedicated forex/treasury teams are being put in place by exporters to tide over the situation. Negotiations are also ongoing with clients to develop new and dynamic pricing models built in sales contracts to take care of currency fluctuations.

Finally, some exporters who can afford to do it are not converting their dollar receivables into rupees, as the exchange rate risk at this point is simply too high.

The respondent exporters to the survey told FICCI that the central bank should give a facility like that in China of a fixed exchange rate.

NSE, USE get SEBI nod to commence trading

National Stock Exchange and United Stock Exchange of India have received approval from the Securities and Exchange Board of India (SEBI) to commence trading in currency options, said officials from the exchanges. USE received the approval from SEBI on Tuesday, while NSE received it on Monday. USE is set to begin its operations very soon once it has complied with all the guidelines laid down by SEBI, said its statement. The options will be introduced on the USD-INR spot rate with three each in ‘In The Money', ‘Out Of The Money' options, and one in the ‘Near The Money' option. USE began its currency futures operations three weeks back recording volumes of Rs. 45,845 crore on the launch day.

“Currency Options on USE provides a very powerful mechanism for corporate entities and SMEs to hedge their currency and at the same time bringing in all the benefits of exchange traded products like transparency and efficient price discovery,” said Mr Madhu Kannan, Managing Director and CEO of BSE, which is the largest single shareholder in United Stock Exchange, holding a stake of 15 per cent. Reacting to the approval given by SEBI to both USE and NSE, MCX-SX said this in a statement, “As usual, SEBI did not communicate anything on our applications dated (31 July 2010), (20 Aug 2010) and (24 Aug 2010) for introduction of currency options on our Currency Derivatives segment.”

Currency options on $/rupee

The Reserve Bank of India and the Securities and Exchange Board of India on Friday decided to allow recognised stock exchanges to introduce plain vanilla Currency Options on US dollar/ rupee exchange rate for residents.

The move to permit the introduction of options on the US dollar-rupee spot rate comes two years after the regulators permitted residents to participate in the currency futures market . This will expand the existing menu of exchange-traded tools for hedging against adverse exchange rate movements.

NSE and MCX-SX, which introduced currency futures in 2008, are all set to launch currency options.

A currency option contract grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For getting this right, a premium is paid to the broker. 

The regulators have specified that the size of each currency options contract will be $1,000. The options will be premium-styled European call and put options. While the premium will be quoted in rupees, the outstanding position will be denominated in dollars.

The maturity of the contracts, which will be settled in cash in rupees, will not exceed 12 months. The settlement price will be the RBI's reference rate on the date of expiry of the contracts. Members registered with the SEBI for trading in currency futures market will be eligible to trade in the options market.

Members registered with the SEBI for trading in currency futures market will be eligible to trade in the exchange-traded currency options market of a recognised stock exchange.

Banks authorised by the RBI are permitted to become trading and clearing members of the exchange traded currency options market of the recognised stock exchanges on their own account and on behalf of their clients subject to their fulfilling minimum prudential requirements -- have a minimum net worth of Rs 500 crore, minimum capital to risk weighted assets ratio of 10 per cent, net NPAs should not exceed three per cent, and have made a net profit for the last three years.

“Introduction of Currency Options has been long awaited by the market and is definitely a step in the right direction. Currency Options is primarily a retail product and we expect corporates and SMEs to enter this market in a big way by hedging their forex risk at minimal cost,” said Mr T.S. Narayanasami, Chief Executive Officer, United Stock Exchange (USE). USE plans to launch currency futures and options shortly.

Forex reserves fall

Foreign exchange reserves fell $144 million to $283.499 billion for the week ended December 25, according to figures released in the Reserve Bank of India's weekly statistical supplement. The reserves have fallen for the third consecutive week.

For the week ending December 18, reserves had fallen by $2.09 billion to $283.643 billion.

Foreign currency assets expressed in dollar terms include the effect of appreciation or depreciation of non-US currencies.

Foreign currency assets decreased by $132 million to $258.719 billion.

Gold reserves remained unchanged at $18.182 billion. SDRs were down by $9 million at $5.172 billion.

The reserve position in the IMF decreased by $3 million to $1.426 billion.

Rupee gains marginally

The rupee gained marginally against the dollar on Tuesday on the back of the rally in the Asian equity indices and the strength of the Asian currencies. The gains in the domestic equity indices also propped up the rupee. But dollar buying by oil importers capped the gains of the domestic currency, said dealers. The rupee opened strong at 45.95 and weakened to touch an intra-day low of 46.09. It ended the day at 46.02 against the previous close of 46.09/10. In the overseas markets, the dollar gained against the euro and the sterling but was weak against the Asian currencies, said a dealer with a public sector bank. In the forward market, the six-month forward premium closed higher at 2.78 per cent (2.67 per cent) and the one-year ended at 2.69 per cent (2.61 per cent). — Our Bureau

Forex reserves fall $2.9 billion

Forex reserves declined by $2.938 billion to close at $273.3 billion for the week ended May 14, according to the Reserve Bank of India's weekly statistical supplement.

This is the second week in a row that forex reserves have fallen. In the earlier week, forex reserves had fallen by $3.395 billion to $276.238 billion.

While currency revaluation could be one of the reasons for the fall, it could also be partly on account of the RBI selling dollars directly to oil companies in order to ease the pressure on the rupee, said a forex dealer with a private bank.

In the week under consideration the foreign currency assets fell by $2.876 billion to $248.597 billion. Foreign currency assets expressed in dollar terms include the effect of appreciation or depreciation of non-US currencies.

Gold was unchanged at $18.537 billion. SDRs fell by $49 million to $4.858 billion. The reserve position in the IMF fell by $13 million to $1.308 million.

Forex reserves rise $1.03 b

Foreign exchange reserves were up $1.037 billion to $282.938 billion for the week ended July 23, on account of revaluation gains.

This is the seventh consecutive week during which the reserves have risen.

For the week ended July 16, foreign exchange reserves were up $2.479 billion to $281.901 billion. From June 11 to July 23, the net addition to forex reserves has been $10.155 billion.

According to the Reserve Bank of India's weekly statistical supplement, in the week ended July 23, foreign currency assets were up $1.037 billion to $256.714 billion.

Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of non-US currencies.

In the week under consideration, the euro has been gaining against the dollar increasing the value of our reserves, said a dealer with a public sector bank.

Gold reserves, SDRs and the reserve position in the IMF were unchanged at $19.894 billion, $4.987 billion and $1.343 billion respectively.

Rupee slips against strong $

The rupee slipped against the US dollar on Friday, tracking the weak domestic equity markets and the stronger greenback in the international market. The Indian currency lost 46 paise to a dollar, touching a month-low at 46.75.

The rupee opened at 46.46 and closed at 46.72, against the earlier close of 46.26.

“While the rupee is inherently strong, one can't disregard global equities and currency markets. There are lot of inflows which is supporting the rupee at these levels,” said a dealer with a private bank.

The euro declined by 200 basis points against the dollar during the day. If the euro weakens still further, the rupee could open at 47, on Monday, said the dealer.

In the overseas market, the dollar is gaining because risk aversion is coming back into the market.

Forex reserves

futures Currency

The cross currency futures launched on the first day of February 2010 by MCX-SX and NSE saw modest, but encouraging, volumes on the first trading day, with both exchanges clocking a combined turnover of about Rs 4,000 crore, accounting for roughly 20 per cent of the total volume in value terms.

What is striking is the wide bid-offer spread in cross currencies of three months tenor. While for the US dollar futures the spread is in the range of 4 paise, for cross currencies it is as high as 58, 69 and 99 paise respectively for Euro, GBP and Yen.

This indicates that the buy side is dominated by hedgers, mostly exporters and there is lukewarm response from the sell side. Going by the first day, the market needs active participation,

Global currency

This is with reference to the two-part article on the dollar ( Business Line, April 22 and 23) and its dominance in the world economy.
Pre-Bretton Woods, the US being the surplus exporter in trillions was able to put the dollar sans the gold cover as a global reserve currency.
Though the US has a large trade deficit, it redefined the economic market theories and the dollar once again became the front runner over the other currencies.
At different cross-roads, the dollar has been a study currency for trade.
The Euro-nations and China have tried their best to counter it, but it has been a daunting task.
Thus, there has to be rethinking and finding a new currency that is acceptable to all. There should be an unbiased universal monitory body to check the currency trade.

Exchange rates

Much of the current debate on the exchange rate misses one link in the chain of reasoning. It proceeds on the general assumption that depreciation is good for exports and appreciation bad. Eventually, we are interested in knowing the impact on the balance of trade due to a change in the rate.

To determine the effect, the Marshall-Lerner conditions refer to the elasticities of imports and exports. The importance given to the real rate of exchange is misplaced. It is a left-over from the days of the theory of Purchasing Power Parity, which even at its height of glory was found wanting empirically. It was, however, meaningful at a time when current account decided the exchange rate. Today, it is the capital account that is at the back of exchange rate movements. In the past, despite the appreciation of the yen, Japan continued to accumulate reserves. If one looks at the records, one can find increasing exports during periods of rupee appreciation. Market intervention to stem appreciation followed by sterilisation of the additional liquidity does not help. The exchange rate

reversing from key resistance

The rupee could not get past the strong hurdle at 44 and reversed lower from the peak of 44.1 recorded on October 7. Choppy movement in the stock market and demand for dollar from importers prevented the currency from appreciating further while continued FII inflows lent strength to the currency. Weak industrial production numbers and spike in dollar pulled the Indian currency down to 44.6 on Tuesday.

Dollar strengthened against the euro and other currencies on short-covering ahead of the FOMC meeting minutes on Tuesday. The dollar index is attempting a feeble recovery from the support around 77. Breach of this level will signal that the index can decline to the November 2009 low of 74. Medium-term resistance for the index is at 79.5.

Dollar-rupee outlook

The rupee is once again reversing lower from the key resistance at 44. As explained earlier, this is the 61.8 per cent retracement (a key Fibonacci number) of the down-move from January 2008 to March 2009. Strong move above can take the currency to 42.5 or even the January 2008 peak of 38. The Reserve Bank is also likely to intervene at this level to prevent the currency from appreciating above 44.

Immediate targets for the currency are at 45.5 and 46.3. The medium-term view for the currency will stay positive as long as it trades above 47.2

USD-INR futures

SBI may hike base rate

State Bank of India's base rate is likely to go up in the current (October-December) quarter in view of the increasing cost of deposits.

Though many banks have revised their base rates as well as BPLRs upwards by 25-50 basis points after the Reserve Bank of India hiked key short-term interest rates in September, SBI has held its base rate steady at 7.5 per cent.

The SBI Chairman, Mr O.P. Bhatt, said in the second quarter the cost of deposits was at the lowest level in the last 12 months.

But it started inching up towards the end of the quarter. Bulk deposit rates too have gone up.

Pointing out that there is a huge amount of pressure on liquidity, the SBI Chief said “It (liquidity) not just getting tighter, but liquidity has become more volatile in the system. Therefore, call rates, short term rates, rates on commercial paper and certificates of deposits too have gone up.” “I think the interest rates will go up on the lending side,” he added.

About 60 per cent of SBI's loan book (by value) is now linked to the base rate, said Mr S. Ranjan, Chief Financial Officer, SBI.

The bank's benchmark prime lending rate is 12.25, which it has raised in August . On credit growth, Mr Bhatt said the banking system is unlikely to reach the RBI projected growth of 20 per cent in FY2011. It may be around 18-19 per cent.

Rights issue

About SBI's proposed rights issue, Mr Bhatt said he is hopeful that the government, which holds 59.41 per cent stake in the bank, will give its green signal before the end of the calendar year. The bank plans to raise Rs 20,000 crore through the rights route by the end of the fiscal year.

“The Government of India has been subscribing to the capital of various public sector banks including those which are adequately capitalised...the capital requirement (from the Government's side) for SBI would definitely be a bit high,” Mr Bhatt said.

Forex reserves

Foreign exchange reserves were up $1.634 billion to $295.792 billion for the week ending October 8, on account of revaluation of reserves.

This is the fourth consecutive week in which the reserves have risen.

For the week ended October 1, foreign exchange reserves were up by $2.563 billion to $294.158 billion.

According to figures released in the Reserve Bank of India's weekly statistical supplement, in the week ended October 8, foreign currency assets increased by $1.593 billion to $268.1 billion.

Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of non-US currencies.

In the week under consideration, the euro had gained against the dollar leading to reserves denominated in euro being re-valued at higher levels, said a dealer with a public sector bank.

Gold reserves were unchanged at $20.516 billion. SDRs rose by $29 million to $5.168 billion. The Reserve Position in the IMF was up $12 million to $2.008 billion.