Religare: RBI likely to have intervened; INR to gain further

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Currency Update
RBI likely to have intervened; INR to gain further
RBI perhaps intervened in the currency markets today by buying dollars for the
first time this year, on the back of a strong appreciation in INR vs. USD to the
tune of 1% in a single day. With Coal India and other IPOs in the pipeline, and
QE2 almost certain in the US prompting global investors to chase growth in
EMs, flows into India is likely to remain strong. Our INR-USD target for FY11-
end remains 42.
RBI likely to have intervened: As per media reports and currency dealers, the
RBI is said to have intervened today in the currency markets, as Rupee
appreciated by 1% in a single day today, breaching 44.10 levels. The Indian
rupee hit 44.09 – the highest since Sept. 1, 2008. Pressure on rupee is likely to
continue, with the Coal India mega IPO (more than $3.5bn) opening on
Monday, 18th Oct. attracting heavy FII flows. This may be the first RBI
intervention in currency market this year, even as other central banks in
emerging market (EM) economies have been intervening. FIIs have pumped in
$22.5bn in equity alone in 2010 year-till-date, with more than $9.8bn coming
in since September alone. The INR has appreciated by 6.6% since the beginning
of September.
Flows to remain strong: With global economic recovery likely to remain
subdued and India being among the fastest growing major economies, and more
IPO/FPO (Power Grid, SAIL, Shipping Corporation etc.) coming in the pipeline,
foreign fund flows are likely to remain strong. The RBI’s often stated policy in
the last two years has been to intervene only to avoid extreme volatility and not
target any band or level for the INR.
INR to appreciate further: We expect the INR to appreciate further, breaching
the 44 mark and hitting 43.50, unless RBI intervenes very aggressively. A
stronger rupee actually helps RBI fight inflation by making imports cheaper and
thus also relieving some concerns over current account deficit, which is
dangerously inching closer to 4% of GDP. Our FY11-end target remains at 42.