Are we out of the woods yet? Should we sell USDINR?

While Rupee has been consolidating in the 60.80 – 61.40 range I have been questioning if appreciation beyond 60.50 levels is warranted and should one go long here.

Had a couple of points in mind:

1. When rupee had surged past 64 – 65 levels, Indian Exports had become cheaper compared to Chinese exports due to sharp depreciation of the INR. INR has since appreciated 11.25% and CNY has depreciated 3% in 2 months. This basically goes to show that Indian Exports will lose the competitiveness and the natural adjustment process associated with depreciation will be halted if rupee continues to appreciate. Is RBI comfortable with rupee below 60.00 levels when other emerging market currencies are depreciating?

2. Looking at the Fx Reserves - Our FX Reserves are at $ 295.448 bn as on 07^th March 2014 from lows of $ 274.806 bn in Sep 13. The maximum Fx reserves held from data analysed since 2001 is $ 320.785 bn held in Sep 11. Can we say that RBI then can atleast absorb further $ 25 bn from the markets to buffer itself against sharp capital outflows / crisis situation and reduce vulnerabilities?

3. Debt Position - In 2011, our debt was $ 318 bn and our forex reserves were $ 320.785 bn. In 2013, our debt was $ 400 bn and fx reserves $ 292.60 bn. Our debt has constantly grown at approx. 15% since 2010 whereas our Fx reserves have not grown in tandem. Should RBI not start building reserves?

Looking at the above three points, I was going long USDINR at 61.00 levels. However, USDINR is being constantly sold on all upticks. Expectations of a Narendra Modi led government and the ensuing structural reforms have seen FII pump money in debt and equity. Moreover, we have increasingly seen a growing trend among importers to hedge themselves after the recent volatility in USDINR. We are at a phase where we are seeing importers fully hedge themselves which leaves little pent up corporate demand to mop up dollars. The buying requirements will majorly be from Oil and defence companies.

Technically, USDINR faces resistance at 61.40 levels. Daily, weekly and monthly charts are bearish. One may go short above 61.00 levels with stop above 61.50 levels for an initial target of 60.00 levels. As per Gann Square of 9 table, if 60.00 is taken out we may see 57.00 on the USDINR. In the mean time, we can closely look at the FX reserves data to pick up signals on RBI’s comfort level on the USDINR.

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