After yesterday turmoil in currency and equity markets, today there is calm. INR opened at 70.80 as against yesterday close of 70.74. Since morning it is trading between 70.50 to 70.80 and market talk indicates intervention. Going forward, RBI may not intervene much if CNY were to weaken further. Rbi may also think twice to intervene as it would suck out INR liquidity which is a an urgent need for economy.
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We now believe that RBI may cut interest rate by 0.5% instead of 0.25% in its monetary meeting (results tomorrow)
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Yesterday US markets were also in tailspin as equity fell by about 3% and US ten year yield dropped to 1,73%; gold rose to 1480. All pointing to huge risk aversion. US officially declared China as currency manipulator and tool the matter to IMF for investigation. This sets stage for further acrimony.
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There is talk of China considering buying crude oil directly from Iran and defy US sanctions. There are reports that Iran has huge reserves of oil stored in China and both countries may find a way to bypass sanctions and use this reserves. If that were to happen, crude may see sharp fall.
Going forward, in addition to CNY, other factors like MTM losses for debt investors, corporate hedging imports, oil companies rushing to buy USD would also play a role and weaken INR. First pause for INR could happen around 71.45 and then 72.20
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To understand for how long could CNY pain persist, we studied past price pattern during similar devaluation by China (Aug 215, Jan 2016 and Aug 2018).
Few observations:
1. INR trailed CNY and maximum movement was in 15-20 days. INR weakness ranged from Rs 2 to 3 per USD
2. During such periods, RBI intervention is relatively less. May be it can’t afford to let INR loose to CNY in export markets
3. 10 Aug 2015 to 24th Aug 2015( China changed method to fix mid rate)- INR moved from 63.87 to 66.7. CNY weakened
4. 23 Aug 2018 to 19 Sept 2018 ( PBOC) foxes CNY higher for few consecutive days. INR moves from about 70 levels to 73 levels
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Suggest to hold on to export hedging and keep hedging near term import exposures.