Rupee gained on Friday on dollar sales by a large corporate, but that was not enough to prevent its first weekly fall in three as markets reeled on disappointment over the lack of specifics in the federal budget. Concerns about the banking sector in Portugal also contributed to the declines, with the BSE share index posting its biggest weekly loss since December 2011. Investors will also look out for the data this week from India, US, Europe & China for direction.
India's industrial production grew an annual 4.7 percent in May, the highest since October 2012, providing welcome positive news for Prime Minister Narendra Modi's new government as manufacturing activity and electricity generation increased. Finance Minister Arun Jaitley unveiled his first annual budget on Thursday, promising to revive the Indian economy from the longest slowdown in a quarter of a century with a mix of structural reforms and fiscal consolidation.
Output from mines, utilities and factories, grew for the second straight month after a contraction of 0.5 percent in March, government data showed. India's foreign exchange reserves rose to $316.39 billion as of July 4 compared with $315.78 billion in the week earlier, the Reserve Bank of India said. India's wholesale price inflation slowed more-than-expected in June to a four-month low, official data revealed.
Wholesale price inflation came in at 5.43 percent in June, the lowest since February and down from 6.01 percent in May, the Ministry of Commerce and Industry said. Inflation was expected to ease to 5.73 percent. The annual increase in primary article prices slowed to 6.84 percent from 8.58 percent. Cost of food articles gained 8.14 percent versus 9.5 percent in May. Likewise, fuel and power prices advanced 9.04 percent, slower than the 10.53 percent rise seen a month ago. Meanwhile, manufactured product prices rose at a faster pace of 3.61 percent after increasing 3.55 percent in May. Build up inflation rate in the financial year so far was 1.28 percent compared to a build-up rate of 1.82 percent in the corresponding period of the previous year.
Budget announcements on FDI
The Budget announcements by Finance Minister Arun Jaitley on opening defence and insurance sectors to higher FDI will attract more foreign investors which will help in strengthening the rupee in medium term. The maiden Budget of the Narendra Modi government hiked foreign direct investment limit in insurance and defence sectors to 49 per cent from 26 per cent. It also proposed tax incentives for two new investment instruments --REITs and InvITs--to help attract long-term funds from foreign and domestic investors, including NRIs.
Data on the RBI's forex forward book suggests that forex intervention in May was around USD 20 billion. The report estimates June intervention to be around USD 7 billion and total RBI intervention in recent months could easily have exceeded USD 30 billion. According to RBI, the fair value of the rupee is in the 60-62 range. Given this liquidation threat, in short-term rupee can see weakness till 61.20-61.50 level.
The dollar was steady against the euro and the yen last week as concerns over the financial health of Portugal's largest lender eased, dampening safe haven demand. Concerns over the fiscal stability of Portugal's Banco Espirito Santo fuelled a sharp selloff in markets on Thursday, amid fears over the risk of contagion. Concerns eased after Portugal's central bank said Friday it was satisfied that the lender is able to fulfill its capital requirements. The US Dollar Index, which tracks the performance of the greenback versus a basket of six other major currencies, was at 80.23 late Friday, up 0.09%. The dollar came under pressure earlier in the week, after Wednesday's minutes of the Federal Reserve's June meeting showed that officials agreed to end the bank's asset purchase program in October, but revealed little new information on when rates could start to increase. In the week ahead, investors will be watching testimony on monetary policy by Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi. Monetary policy announcements by the BoC and the Bank of Japan will also be in focus, while China is to release data on economic growth.
Technically: Now market is looking to take support at 60.70, a break below could see a test of 60.20 and whereas resistance is now likely to be seen at 61.95, a move above could see prices testing 62.80.
ACTION: BUY USDINR @ 60.00 SL 59.56 TGT 60.56-61.20.