Food Inflation risks Indian rupee, EURINR uptrend remain intact

Despite petrol and diesel prices being cut for the second time in a row in April, the marginal increase in inflation will be most likely driven by a spike in food and vegetable prices. As stated in our earlier posts with unseasonal rainfall continuing to lash parts of India and news of crop loss filtering in and the spike could potentially be higher.

The Indian state of Uttar Pradesh has already sought assistance of about INR 10 bln from the central government to provide relief to the farmers who have been affected. So far, the impact of the crop loss is yet to percolate to the retail level. However, we feel that the impact would be more visible during Q2 of 2015. Nevertheless, with fairly benign CPI and a WPI inflation that is contracting, the upside to inflation from the current level may well be limited.

In fact, with core CPI (as per the new series) the lowest so far, and core WPI turning negative for the first time since July 2009 (thanks mainly to negative manufactured product inflation), the threat of a wage price spiral seems limited. This is also substantiated by a low level of capacity utilization.

Technical Watch:

On daily and weekly charts, no downside risks are seen. However it may have minor corrections in intraday sessions to find supports and bounce back. Traders should cover shorts as we don't see any trend reversal signals. RSI (14) and Bollinger bands indicate a positive convergence with price curve. And CCI & Stochastic signal no ham and uptrend is still persist for some more trading sessions.

Derivatives mirror:
Option Strategy: Call Replacement

Call Replacement Strategy involves selling the underlying currency and replacing the same with an equivalent Call option.

Use profits made by selling the underlying to purchase the call option. So, always remember this position has to be created through house money.

By executing this strategy, if the underlying price drops then you may have already taken your money off the table and by purchasing the call you are still participating in the up move of the underlying currency.

Thus Call Replacement strategy locks in a minimum profit and still allows you to participate in the upward movement of the underlying currency.

So this strategy also provides an opportunity to invest the sale proceeds of the stock in other risk free investment avenues. While building position ATM Call is considered to be the best one as ITM Calls are more expensive and they eat up more of the realized profits.

Hence, predominant role of Delta in this case is very crucial because it measures the every alteration in option premium with respect to the underlying movement. In other words, it helps in ascertaining the ideal option premiums so as to make our cost of hedging cheaper.