Rupee Appreciation Likely On Fed Cut Hope, Easy Liquidity

The rupee is expected to appreciate further. Since the non-farm payroll data released in the United States has been below expectations, all major currencies have begun appreciating against the dollar. This will indirectly impact the rupee movement as well. Since the non-farm payroll data has strengthened hopes of rate cut by the US in its forthcoming policy meeting on September 18, fund flows to emerging markets such as India are expected to continue. If the rupee appreciates below 40.60, it may lead to demand for dollars from importers, especially oil companies, since crude prices are also on the rise. However, the market expects the RBI to intervene if the rupee falls below 40.50. Forward premiums will be rangebound this week due to surplus liquidity. They may fall further if the market receives dollar inflows either from institutional investors or exporting companies.

Liquidity is likely to remain surplus this week as well. The foreign exchange inflows are no longer a steady source of funds, at least for the time being. Call rates are expected to rule easy this week as liquidity is surplus. They may inch up slightly if there is pressure on the rupee to depreciate. The rupee demand will rise if unwinding of the yen carry trade forces institutional investors to liquidate positions in emerging markets. Anticipating advance tax outflows, banks may play safe with liquidity impacting the availability of liquidity in the market in the very short term. The RBI will auction the 91-day and 364-day treasury bills for notified amount of Rs 3,500 crore (Rs 3,000 crore for MSS) and Rs 3,000 crore (Rs 2,000 crore for MSS). The cut-off yield on t-bills is expected to rule around similar levels as in the last week. According to dealers, liquidity is comfortable although advance tax outflows outflows are slated. Liquidity is important as any change is immediately reflected in the short-term interest rates.