Friday (7/6/07) - Rupee / Dollar /Gold market review

India’s benchmark 30-share Sensex stock index crossed the key 15,000-point mark during trading yesterday for the first time amid easing interest rate worries.
Dealers said buying sentiment improved on sustained interest in capital goods, engineering and software stocks against a backdrop of fast-paced economic growth in the South Asian economy.
The benchmark Sensex rose as much as 145.33 points or 0.97 % to a new intraday record of 15,007.22 before closing at 14,964.12, up 102.23 points or 0.69%.
Dealers said the market’s buoyancy was due in part to strong earnings data and lower inflation, which has eased interest rate hike concerns.
“We expect the markets to remain strong over the short term, probably ending the year higher than they are now,” said Andrew Holland, the managing director of DSP Merrill Lynch.
“There is also a catch-up factor with global markets,” he said, noting that some global markets had hit new highs in recent times. Rupee / US DOLLAR / Euro/ Yen/ GOLD
India’s inflation rate jumped by a tenth of a percentage point to 4.13% yesterday, fuelled by higher food prices, but still remained at a 14-month low.
The central bank has hiked benchmark interest rates nine times since late 2004, driving borrowing costs to five-year highs.
“Investors have been positively surprised by the stronger-than-expected appetite for issuance over the past month and also by favorable inflation data,” said Rajeev Malik, an economist at JP Morgan Chase Bank.
The index’s rise has been helped by a flood of foreign money attracted by strong corporate earnings and faith in India’s economic growth prospects.
India’s economy grew by a stronger-than-expected 9.4% in the financial year to March 2007 and another year of robust growth is expected this year. The market has risen by 8.53% so far in 2007 after climbing by a record 46.7% in 2006.
Foreign investments in equities total $6.4bn so far this year, far ahead of last year’s level of $2.84bn over the same period.
Indian companies are set to report next week first-quarter earnings data for the three month period ending June. “We expect Indian corporates to show sound earnings data, which could keep the markets buoyant,” said Naresh Garg, the chief investment officer at the Sahara Mutual Fund.
The rupee, Asia’s second-best performing currency this year, gained for a fourth week on optimism economic growth and a rallying stock market will attract more overseas investment.
The currency extended the biggest quarterly gain in at least 34 years in the three months through June as the benchmark stock index rose to a record this week. India’s capital-account surplus jumped 74% in the March quarter from three months earlier, the central bank said on June 29.
“The supply of foreign exchange remains strong and this should help the rupee maintain its appreciating bias,” said Rohan Lasrado, a currency trader at HDFC Bank Ltd in Mumbai. “Stock inflows, overseas borrowings by companies and direct investment continue to be ample.”
The rupee rose 0.6% to 40.455 per dollar this week as of the 5pm close in Mumbai.

The Indian rupee eased on Wednesday as dealers booked profits after the Indian unit had rallied to a one-month high in the previous session, though capital inflows into local stocks were likely to limit losses.

Rising asset prices and the mounting cost of foreign exchange intervention are prompting Asian policy makers to step back from markets, setting the stage for a faster rise in regional currencies.

In a region that routinely curbs currency strength to help underpin exports, official concerns about higher exchange rates have been further soothed by the resilience of overseas sales this year despite a slowdown in the US.

Most Asian countries tightly manage their currencies while trying to run an independent monetary policy.

This can create a conflict. Tighter conditions can attract capital, pressuring the currency to rise, which becomes costly to control. This is known as the impossible trinity.

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"They have seen the limits of the system, though they are not going to end intervention completely by any means," said Marshall Gittler, chief Asia strategist at Deutsche Bank Private Wealth Management.

Underlining the tolerance for higher exchange rates, Malaysia's trade minister Rafidah Aziz said last week that a firm ringgit had not hurt the country's exports, and local firms are taking the currency's strength in their stride.

Indonesian officials have said they were comfortable with a stronger rupiah.

India's central bank admitted in its April policy review that "dealing with the impossible trinity of fixed exchange rates, open capital accounts and discretion in monetary policy had become more complex than before".

For that reason, it allowed the rupee to jump 10 per cent versus the dollar in about three months from early March to achieve monetary policy control to fight against inflation.

The rupee is the best performer in Asia so far this year, although with inflation easing, India's central bank may well tighten its currency reins once again, analysts say.

Tim Condon, head of Asia research at ING, said in theory it's impossible to manage the so-called impossible trinity, although Asian countries have tried.

"But it's becoming more and more difficult in a globalised world," he said.

Struggling

Morgan Stanley says India, Malaysia, Singapore, the Philippines and Thailand are all struggling to check their currencies while controlling monetary policy with relatively open capital accounts.

In theory, fixing an exchange rate alongside an independent monetary policy can only work with capital controls.

Foreign exchange reserves in Asia ex-Japan have doubled from 2003 to $2.4 trillion as central banks limited currency gains, but the costs of piling up such reserves are mounting.

"The costs of reserve accumulation for a number of countries have reached levels which would appear difficult to sustain," HSBC currency strategist Rich-ard Yetsenga said. He estimated the cost of accumulating foreign exchange reserves had reached around four per cent gross domestic product in India, Malay-sia, Philippines, Thailand and Singapore. Capital is flowing into the region's high-flying stock markets while property prices are also booming. This raises concerns about future inflation, prompting Asia's more tolerant policy makers to tighten monetary conditions by letting currencies rally.

Analysts believe the Indonesian rupiah and Malaysian ringgit would benefit from the new policy tolerance.

A noticeable exception to the more tolerant currency attitude is South Korea, where officials have voiced repeated concerns about the won's strength against the dollar and particularly the yen, the currency of export rival Japan.

In recent months, the won has hit its highest levels since the Asian financial crisis.

At 9:50 am, the partially convertible rupee was at 40.56/57 per dollar, slipping from 40.5500/5675 on Tuesday, when it had touched a one-month peak of 40.44, before it was driven back by suspected central bank intervention.

The rupee has been trading in a 40.50-41.25 range since early May, with the central bank widely seen buying dollars each time the rupee tests 40.50.

"People were taking profits this morning, especially after the central bank showed its resolve in defending 40.50 yesterday," said the chief dealer with a private bank.

The rupee hit a nine-year high of 40.28 in late May, but was knocked off its peak by suspected central bank intervention. Still, dealers said that strong capital inflows into the stock market, which is trading at record highs, were likely to bolster the rupee. Foreign funds have poured $5.7 billion into Indian equities in 2007 after investing about $8 billion in 2006.

The rupee has risen by more than 9 per cent against the dollar this year.

"Dollar-rupee was better offered yesterday on IPO related inflows and a better equity market performance. Watch for a break below 40.50 this week, which could trigger stops and likely spark a sell-off towards 40.30," The Royal Bank of Scotland said in a note on Wednesday.