Sell USD-INR as markets go past FCNR outflows - SocGen

Amit Agrawal, Research Analyst at Societe Generale, suggests to sell USD-INR near highs on getting past of outflows.

Key Quotes

“USD-INR has rallied by 2.8% since the November 8 close (the night of US elections and also India’s announcement of demonetization of high-value currency bills) and briefly touched all-time highs on November 24. India has suffered significant outflows in November - with FCNR outflows estimated at $13bn in addition to portfolio outflows at $5bn, but the worst should be over for FCNR outflows. The RBI hiked incremental CRR to 100% in an effort to mop up INR3.2tn liquidity along with steps to increase MSS (market stabilization scheme) limits to withdraw medium term liquidity should help contain INR depreciation.”

“We believe that the RBI will continue to smooth volatility, especially on the top side, given that USD-INR trades very close to the all-time highs. The recent high (at 68.86 in spot), which is also the high reached in Aug-2013 and Mar-2016 should act as a strong resistance, especially given the steep rise is indicating that USD-INR is overbought. We expect USD-INR to retrace back to the 66.50-67.50 area.”

“Expression:  Short USD-INR 1m NDF at 68.72

We recommend selling USD-INR 1m NDF at 68.72, with a target around the previous range prior to the recent spike at 67.00 (+ 2.50%) and a stop above the previous highs at 69.50 (1.14%).  The trade horizon is 2-4 weeks and the trade has positive carry of 39bp/month.”

“Risks: Basket selling in Emerging Markets

If emerging market currencies sell-off on global events around the OPEC meeting, Italian referendum, ECB meeting or Fed meeting, the INR might sell off from the current levels. Domestically, continued portfolio outflows would be detrimental.”