Indian Rupee fell to 6-month low levels against the USD. The INR weakness was largely due to concerns that India’s fiscal deficit will widen after the government said it was considering measures to boost growth. Further, the Fed guidance for one more rate hike in 2017 added additional pressure to the INR. The Indian government is planning to loosen its fiscal deficit target to spend around Rs. 500 billion to halt an economic slowdown. GDP growth fell to 3 year lows due to Demonetisation and GST implementation. Recent GDP data showed that India’s GDP grew by 5.7% in Q1 2017-18. Indian Rupee depreciated by 1.11% against USD last week.
The INR fall is temporary given India’s strong macros. CAD is at 2.4% of GDP as of 1st quarter of fiscal 2017-18. Fiscal deficit is targeted at 3.2% of GDP for this fiscal, inflation is at below 4% levels and fx reserves are at all time highs of USD 402 billion and technically at USD 428 billion with RBI carrying USD 26 billion of outstanding forwards.
Further, Masala bonds or rupee-denominated bonds issued overseas would now be part of only external commercial borrowings and not part of the overall limit of corporate bonds. This will allow about Rs 440 billion limit increase for FII’s under corporate debt. Essentially, this amount pertaining to such bonds would be separately allocated to the investors and it would increase the corporate bond investment limit for foreigners. The overall limit for FII remains the same at Rs 2443 billion. This move by the RBI will provide support to the INR at a time when FII’s have exhausted the corporate bond limits thereby preventing more flows into the market.
USD ended the week in positive territory after Federal Reserve confirmed that it sees one more rate hike this year. Fed also suggested that it will raise rates by two to three times in 2018 and 2019 if inflation holds to its own forecasts. The announcement of Fed plan to reduce the balance sheet size of USD 4.5 trillion, caught market participants by surprise, sending the USD sharply higher. However, USD fell in the later part of the week as tensions between the U.S. and North Korea re-emerged.
Market sentiment weakened after North Korean leader Kim Jong Un said on Friday that Pyongyang will consider the “highest level of hard-line counter measure in history” against the U.S. in response to President Donald Trump’s threat to destroy the country.
USD started the week on a high note recovering from Friday’s losses caused by downbeat U.S. economic report as data released showed that U.S. industrial and manufacturing production unexpectedly fell in August. USD rose sharply on Wednesday after Fed FOMC meet.
U.S. Commerce Department reported on Tuesday that the number of housing starts unexpectedly fell in August, while building permits unexpectedly jumped. Data released showed that housing starts decreased by 0.8% from the month before to 1.180 million units in August from July’s total of 1.190 million units, against the expectation of a rise by 1.7% to 1.175 million units.
Building permits issued jumped by 5.7% to 1.300 million units in August from 1.230 million in July, against the expectation for a decline by 0.8% to 1.22 million units.
U.S. import prices posted their biggest gain in seven months in August, while the current account deficit widened more than expected in the second quarter.
Existing home sales declined by 1.7% in the month of August from July to an annualised pace of 5.35 million homes, against the expectation of 0.3% rise to 5.46 million.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 16th September fell by 23,000 to 259,000 from previous week’s total of 282,000 against the expectations of a fall by 18,000 to 264,000.
A separate report showed that manufacturing activity in the Philadelphia area increased unexpectedly in September to 23.8 from 18.9, against the expectation of 17.2.
British pound depreciated by 0.66% against USD last week as U.K. Prime Minister Theresa May disappointed the market. In her widely publicized Brexit speech on Friday she provided nothing of substance and made no mention of the terms of exit including the divorce payment she expects to pay the European Union. However, British pound is likely to remain supported on the back of BoE’s hawkishness. U.K. retail sales rose significantly more than anticipated in August, hardening the case for a rate hike.
Euro marginally appreciated by 0.05% against the USD last week as traders looked ahead to Sunday’s German elections in which Chancellor Angela Merkel is widely expected to secure a fourth term.
Asian currencies were broadly lower last week against the USD. Australian Dollar depreciated by 0.5%, New Zealand Dollar appreciated by 0.42%, Japanese Yen depreciated by 1.04% against the USD and depreciated by 1.06% against the Euro. South Korean Won depreciated by 0.43%, Philippines Peso appreciated by 1.14%, Indonesian Rupiah depreciated by 0.54%, Indian Rupee depreciated by 1.11% against the USD and depreciated by 1.24% against the Euro, Chinese Yuan depreciated by 0.57%, Malaysian Ringgit depreciated by 0.2% and Thai Baht appreciated by 0.05%.