Rupee to remain sideways

Indian Rupee continued to surge ahead and put on 0.5 percent for the week. This was a third straight week of gains for Rupee as foreign funds turned active buyers of Indian assets, especially debt, despite lingering concerns in global markets including the prospect of earlier-than-expected U.S. rate hikes. FII's bought debt of over $2.5 billion in a single day, a record, on Thursday (21/08/2014). The Indian rupee rose on Friday (22/8/2014) to touch a high of 60.39/40 levels against the dollar on continued strong buying of debt and shares by foreign investors, while gains in emerging market currencies also contributed to the improved sentiment. Over the week rupee traded in the range of 60.39-60.88 levels and appreciated 0.50%. Rupee ended the week at 60.47 levels compared to its opening level of 60.77. India's foreign exchange reserves rose to $319.39 billion as of Aug. 15, compared with $319.35 billion a week earlier. In the forward segment 1mth, 3mth, 6mth and 12 mth annualized forward premia closed at 8.19%, 8.36%, 8.41% and 8.13% compared to its opening at 8.71%, 8.37%, 8.36% and 8.17% respectively.

Elsewhere in Asia, China’s yuan dropped after disappointing factory output data. The yuan posted its biggest weekly loss since June after a preliminary reading of manufacturing in a Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics came in at a three month low of 50.3 for August, down sharply from 51.7 in July and well shy of forecast estimates of 51.5, suggesting that industrial demand and investment activity growth will likely stay on a relatively subdued path. The drop in Chinese manufacturing follows a slump in credit expansion and slowing growth in investment spending in July. While the People's Bank of China has signaled it will maintain a "prudent" policy stance, any further deterioration this quarter may force a looser setting.

INDIAN STOCK MARKET

Equity markets were on a roll, setting the stage for the benchmark indices to witness two successive record highs during the week. Prime Minister Narendra Modi’s announcement of a scheme for financial inclusion boosted the market sentiment along with the news of easing whole-sale price inflation. Also, speculation of an upward revision of India's sovereign rating outlook by global rating agency S&P, positive global cues and falling crude oil prices were added positives. Banking on the growth revival hope, foreign investors have poured in nearly $12.8 billion in Indian equities so far. While in debt the total inflow in this calendar year has been $16.7 billion. For the week, the BSE benchmark index gained 316 points or 1.2% to end at 26,419 and the Nifty advanced 122 points or 1.6% at 7,913. In intra-day trades, both the indices had scaled a high of 26,531 and 7,929 respectively. Broader markets which encompasses the mid and smallcap indices surged through the week with buying interest visible across the sectors. The midcap index was up nearly 4% and the smallcap index added 1.2% for the week. During the week market witnessed FII inflows to the tune of $433.19 million in equities and $3.01 billion in debt, making it total net inflows of $3.44 billion.

OUTLOOK

Fundamental
On the domestic front, Rupee has put up an impressive performance despite the surge of dollar globally. Inflows are likely to continue, at least till mid-September. Thereafter, we expect the market participants to get cautious and see how events unfold in the U.S in October. Till then USDINR pair is likely to witness sideways movement with increasing volatility till Diwali. As for this week, it is a holiday shortened week. The markets would be closed on Friday, August 29 for Ganesh Chaturthi. The only data on tap domestically is the GDP growth for the April-June quarter to be released on Friday. Last quarter the growth was 4.6%. For the next few sessions, key factors to watch out for would be debt market as well as crude prices. As long as these two factors stay positive, Rupee will remain well-supported. On the other hand, if month-end dollar demand from oil companies goes up then Rupee may move down marginally. Overall for the immediate few trading sessions (this week) the trading band for USDINR may be 60.20 – 60.90. As mentioned in our previous reports also, the broad range for the pair will continue to be 59-62 with risk on and risk off environment swaying Rupee in both directions. We would also like to add that though the geopolitical concerns remained subdued last week but we cannot ignore the volatility arising from such a risk which appeared to be again flaring up last Friday. Tensions over the crisis in Ukraine remained in focus after NATO said it was observing an alarming increase in Russian forces near the border with Ukraine. 
Ukraine declared on Friday that Russia had launched a "direct invasion" of its territory after Moscow sent a convoy of aid trucks across the border into eastern Ukraine where pro-Russian rebels are fighting government forces.