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September industrial production released last Friday was just below expectations at 3.8% YoY. It is still a mediocre performance however with production up only 3.1% in the first three quarters of the year, slower than the 5.2% growth in 2016. October CPI inflation is due today and we look at 3.5% YoY.
This is just below RBI’s mid-point target of 4% and well within the 2-6% range. It is expected to track higher due to higher food prices, housing rentals, and an increased risk from higher oil prices.
At the same time, however, there were positive developments from the GST front last Friday. The GST Council said it will lower the tax rate on 178 items to 18%, leaving only 50 items in the top 28% tax bracket. This should help contain the upside risks of inflation. The next GST Council meeting will be in early January 2018.
Overall, the inflation report today should not change market expectations that much for RBI monetary policy. We expect RBI to stay on hold at 6% at the last policy meeting for this year on 6-December and maintain a neutral bias.
The rupee posted its biggest weekly decline against the US$ since September, as global crude oil prices hovered near multi-year highs, denting appetite for domestic assets.
For USDINR, a continued rise in oil prices remains the key risk factor. Otherwise, we suspect RBI would be content to see a stable USDINR for now between the 64.50-66.00 range.
Hence, the USDINR (near-month expiries) for November contract on the NSE ended at 65.32. The November contract open interest increased 5.92 % from the previous day.
The open interest rose by 5.64 % for December month delivery, it is expected that the USD to meet supply pressure at higher levels. Hence, we reckon it is wise to utilize rallies in the pair to stay short on the USDINR.
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -56 levels (which is mildly bullish) while articulating (at 11:39 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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