Rising trade deficit to dampen rupee’s prospects across India

Rising trade deficit along with chances of a populist budget might dampen rupee’s prospects during the coming week. Nevertheless, persistent interest of Foreign institutional investors (FIIs) in India’s equity market will arrest any sharp depreciation moves.

“The 25-month high trade deficit may put brakes for strong rupee appreciation. Equity markets also looks stretched and a cool-off looks imminent now. Eyes will be on the budget and the ballooning fiscal deficit, which can be a challenge for the local currency,” said Sajal Gupta, Head, Forex and Rates, Edelweiss Securities.

On the other hand, new IPOs and hopes of healthy Q3 earning results will retain FIIs’ interest in equities.

“We have two IPO subscriptions next week, which can attract FII participation and keep the USDINR spot lower,” said Rahul Gupta, Head of Research-Currency at Emkay Global Financial Services.

“However, RBI’s intervention will be eyed. In spot 73 is acting as strong support, a break of which will push prices towards 72.70-72.75 and then the 72.50 zone. However, 73.50 will act as immediate resistance,” he added.

Till now in January, FIIs have invested around $ 2.3 billion in equities.

Consequently, the rupee continued to appreciate and closed at 73.07 to a greenback.

“We have an important event this week. President-elect Joe Biden and Vice President-elect Kamala Harris will be sworn in during the 59th inaugural ceremony in Washington DC on January 20. It is important that this event passes peacefully in light of the recent violent attack by Trump supporters on the US Capitol. We expect rupee to consolidate in the range of 72.75 to 73.3 for this week with depreciating bias,” said Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities.

The swearing-in assumes significance since the incoming US administration has announced a new stimulus package. If enacted, the $1.9 trillion package will deliver a further jolt of fiscal stimulus to the struggling US recovery.

“As the newly elected President takes charge more clarity on the stimulus package will be important to watch. Market participants will also be keeping an eye on the ECB and Bank of Japan policy statement; expectation is that the both the major central banks are expected to maintain a dovish outlook,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. India’s foreign exchange reserves rose by $4.483 billion during the week ending Jan.1. According to the Reserve Bank of India’s weekly statistical supplement, the reserves increased to $585.324 billion from $580.841 billion reported for the week ended Dec.25.

India’s foreign exchange (forex) reserves comprise of foreign currency assets (FCAs), gold reserves, special drawing rights (SDRs), and the country’s reserve position with the International Monetary Fund (IMF).On a weekly basis, FCAs, the largest component of the forex reserves, edged higher by $4.168 billion to $541.642 billion.

Besides, the value of the country’s gold reserves increased by $315 million to $37.026 billion. However, the SDR value remained flat at $1.510 billion. Similarly, the country’s reserve position with the IMF remained static at $5.145 billion.

Global cues along with domestic quarterly earning results and progress of the vaccine rollout programme will determine the trajectory of the Indian equities markets during the coming week.

Besides, volatile is expected to rise in the run-up to the Union Budget FY22 and high value proposition.

“The Nifty has given the first signs of reversing after a steep rise. Deteriorating advance decline ratio has also raised concerns over the last few days of the possibility of a formation of a short term top. 14,653-14,215 points are supported for the Nifty for the coming week,” said Deepak Jasani, Head of Retail Research at HDFC Securities.

“Stock specific moves will continue based on results and other developments.” The week ahead will be heavily influenced by Q3FY21 corporate earnings as companies like Asian Paints, HDFC Bank, Mindtree, Hindustan Zinc and Mphasis are expected to announce their quarterly results.

“Banking and Finance sector will be in focus as major Banks and NBFCs are to release their quarterly results,” said Geojit Financial Services’ Head of Research Vinod Nair.

“The market can be volatile going forward, including concerns over the Union Budget. We suggest investors consider partial profit booking,” said Nair.

According to Siddhartha Khemka, Head, Retail Research, Motilal Oswal Financial Services: “Next week, we would see a lot of macro data getting announced along with ECB, BoJ and PBoC interest rate decisions.” “As the long term market structure remains positive, we advise investors to adopt the ‘Buying on Dips’ strategy to accumulate quality stocks.