Saturday, April 3, 2010


INR appreciation – Concern for export oriented sectors
The INR has appreciated by 2.4% and 3.3% in the last one month and the last three months respectively. The USD- INR has crossed the psychologically important level of 45 on the back of higher foreign inflows (~USD 4bn, the second highest ever for a month) as funds are being pumped into the Indian equity markets by the FIIs. Resultantly, the stock markets are trading at near one year highs, with Nifty trading currently at over 5300 levels.

This appreciation of INR would affect the export oriented sectors such as Information Technology, Pharma & Textiles. The CNX IT Index has pared 2.5% in the last few trading sessions and the CNX Pharma Index has pared 1.7% from the highs of 26th March due to the appreciating INR.

As can be seen from the above chart, from the highs of over 50 in Feb ‘09, the INR has been gradually appreciating against the USD on the back of robust GDP growth, stronger economic fundamentals (even boosted by an inclusive and progressive budget, which also looks to cut the fiscal deficit), rising inflows into the equity markets from the FIIs, rollback in stimulus packages in the west and a weak sentiment against the USD.

Rising Dollex due to higher risk appetite
From ~75 levels in Nov-Dec, during which the US economy was coming out stronger from the recession than the Euro area, the Dollex has been rising consistently reaching above 80 levels as the Euro and Yen started appreciating against the Dollar. In the last few days, the announcement that Eurozone leaders would help Greece with its debt servicing problems has allayed concerns and resulted in short covering helping the Euro appreciate against the USD.

Also, with the most economies coming out of woods, the risk appetite is gradually returning and the investments are more channeled towards the higher yielding currencies and away from the USD. Recently France has come up with good numbers on economic front and even countries such as New Zealand and Australia have started to report good economic growth. With this, we expect the USD to pare safe haven status in the medium term and hence one could look at a moderately rising Dollex from these levels as currencies such as Euro and Won are expected to be stronger going forward.

To read the full report: INR-USD