Wednesday, September 21, 2011

Rupee slide continues

India's rupee slid to a two-year low against the dollar on Tuesday on worries over the EU debt crisis.
Italy’s rating was lowered on concern that weakening economic growth and a “fragile” government
mean the nation will struggle to reduce the euro- region’s second-largest debt burden. Italy was
lowered to A from A+ with a negative outlook four months after the company warned the country
risked a downgrade. Italian banks including Intesa Sanpaolo SpA and state-controlled companies such
as Enel SpA may have their credit ratings lowered by Standard & Poor’s in coming days.
The partially convertible rupee weakened to 48.23 rupees to the dollar on increasing demand for the
greenback from banks and importers. The Indian rupee outlook is turning bearish and USDNR may
approach 50 mark soon. Inflation in India is the worst among the BRIC nations. Current account deficit
is a concern. Fiscal deficit is a worry. Fresh investments are stalled despite creaky infrastructure. The
ongoing EU problem is going to have a huge impact on both current and capital account of the country
to pressure the INR. In futures USDINR Sep futures closed at 48.09 levels on Tuesday, up by 23 paisa.
The EURINR Sep gained 43 paisa on stable EURUSD along with firm USDINR. The GBPINR Sep future
advanced 27 paisa. The EURUSD is currently trading firm in Asia after a modest recovery from 1.3590
yesterday. The pair is currently quoting at 1.3715 with immediate resistance at 1.3744. Break above
may pull rates higher towards 1.38 or so. This may push the EURINR higher today in India. The GBPINR
is also looking a bit positive tracking the Euro. However, the BoE minutes will be critical for the British
Today US FOMC will announce its monetary policy decision. The market is expecting the Fed to
maintain its zero-0.25% interest rate target, but the focus will be on new unconventional policies
aimed at supporting the US recovery. The primary expectation there is that the Fed will announce a
plan to lengthen the maturity of its portfolio of US Treasuries by selling shorter dated notes and buying
longer dated debt to push consumer lending rates down. If such a policy is adopted, and there is no
change to the overall size of the Fed’s balance sheet, the impact on the USD may be slightly positive.

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