Weekly Performance of Currencies

The Indian Rupee (INR) delivered good performance in the last week as the currency appreciated more than 1% to close at 46.42 against its close of 46.94 in the previous week. The currency rose to a one-month high in the last week as initial public offerings on the domestic equity front led to a rise in capital inflows. FII inflows in the month of July 2010 stood at Rs16,617cr against Rs10,508cr in June 2010. Year-to-date FII inflows in India totaled Rs47,694cr. Weakness in the US Dollar Index (DX) also provided strength to the INR. The RBI raised the repo rate by 25 basis points to 5.75%, whereas the reverse repo rates were increased more than market expectations. Reverse repo rate was increased to 4.5% from the previous of 4%. However, the CRR rate was left unchanged at 6%. The central bank also raised its March-end inflation forecast to 6% from the previous estimate of 5.5%.

Economic data from the US, the world's largest economy has come on the negative side in the last few days. This has led to lower expectations of a rise in interest rates in the US any time in the near future. On the back of this, the DX depreciated in the last week to close at 81.54. The DX weakened despite mixed sentiments in the financial markets, which is neither too positive nor very negative. Performance of the Euro was good as the currency gained 1% in the last week as slow and steady recovery in the Euro Zone and positive economic data provided support to the currency.

The German consumer climate index increased to 3.9 in July as against expectations and the previous figures of 3.6. Moreover, the M3 money supply in the Euro zone grew by 0.2% in June as against the expectations of 0.1% decline. In the previous month of May, the money supply had declined by 0.1%.
Loans to the private sector rose by 0.3% in June as per data reported by the European Central bank (ECB). Positive economic data has led to re-emergence of demand for the Euro despite the impact of the ongoing sovereign debt crisis.

Economic Update
• Moody's Investors Service upgraded India's currency rating to Ba1, just a notch below the investment grade, taking into consideration the recent reforms adopted by the government to reign in the fiscal deficits.
• New Home sales in the US increased to 330,000 in June as against 267,000 in May. Markets had expected the new home sales to increase to 317,000.
• The advance GDP figures reported on Friday indicated that the US economy grew at a slower pace in the second quarter on the back of slowdown in consumer spending. The world's largest economy grew at 2.4% in the second quarter as against expectations of 2.5%. In the first quarter, the US economy grew by 3.7%.
• The revised consumer sentiment index improved slightly in July. The index reported figures of 67.8 in the current month from 66.5 in the previous month. Markets had expected the consumer sentiment to rise to 67.3. Moreover, the Chicago PMI also increased to 62.3 in July as against 59.1 in the previous month.
• The IMF in its stress tests said that the US financial system remains fragile and might need around $76 billion in additional capital. Despite the financial system approaching towards stability, poor economic scenario has enough potential to bring the financial system into trouble.
Outlook
In this week, we expect the Indian Rupee to trade with an appreciation bias as weakness in the DX coupled with continuing inflows in the domestic markets will help support gains in the currency. Poor economic data from the US will continue to cap rise in the DX and we expect the currency to weaken in this week. We expect the Indian Rupee to trade in the range of 45.85 to 47.15 in this week.