Indian Rupee seesaws

Global financial markets faced a dilemma in the last week amid a host of mixed news on the economic front. This led to a mixed trend in the Indian Rupee last week which closed on a flat note at 46.83. During mid-week, the Rupee received some support on account of easing concerns over the global economy as economic data from China came on the positive side. Also, economic data from India was supportive as the Industrial Production figures came in at 17.6%, the sharpest rise since December 2009. This helped to lift sentiments in the domestic markets but the positive momentum built over the last few days came to a halt as the equities closed the week in the negative territory.

What helped to provide trigger to the global equity markets mid-week was the positive economic data from China. The country's industrial output rose 16.5 percent from a year earlier, but this was less than the previous figures of 17.8%. Retail sales rose by 18.7 percent as against a previous gain of 18.5 percent. China's foreign trade and exports continued to surge in May. Data indicated that foreign trade jumped by 48.4 percent whereas exports increased by 48.5 percent.

Economic data only from China was satisfactory as the US and UK data came slightly on the bearish side. US ISM manufacturing index fell to 59.7 in May from a previous figure of 60.4 in April. The UK housing market is slowing down again, as the latest monthly survey shows that prices fell by 0.4% in May, after a 0.1% drop in April, taking the average UK house price down. UK manufacturing unexpectedly weakened in April for the first time in three months as car production dropped and factory output fell 0.4 percent from March. Retail sales inthe US unexpectedly dropped in May by 1.2% in May from a previous increase of 0.6% in April.

Fears over the sovereign debt crisis in the Euro Zone continue and the coming week could witness re-emergence of fears. Global economy continues to remain vulnerable to downside risks. The Japanese Prime Minister in his statement last week said that he fears a Greece-like crisis in Japan. The country needs to deal with its swelling national debt as the country has the largest public debt among industrialized nations at 218.6% of its gross domestic product in 2009.

This indicates that worries over the economic front have not eased and the coming week is expected to witness selling pressure. We expect this to lead to a rise in risk aversion in the financial markets which will reduce demand for higher-yielding and riskier investment assets, thereby reducing demand for equities and commodities. On the back of this, the Indian Rupee could depreciate as weak global economic news could lead to weakness in the currency.

Fundamental Outlook

The European debt crisis will continue to have an impact on the global equity markets. A package of $1 trillion to the ailing European has not helped to contain losses. We expect fears over the European sovereign debt issues to continue to haunt financial markets in the next week. On the back of this, domestic markets may witness concern over capital outflows from the country in the short-term. Hence, we expect the Rupee to trade with a depreciation bias in the coming week with support seen at 46.30/45.55 and resistance at 47.75/48.85.