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FED would be meeting on 14 and 15th DECEMBER to decide on the first rate hike this decade in USA. Considering that unemployment has reduced to the target levels in US and economy is reasonably strong (expected growth rate of 2.5% in 2016) FED will most likely increase the rate of interest. Apart from economy USA have their own compulsions as low interest rates affect saving cycles and debt fund returns in which social sector investments are the major contributors.

Here comes the tussle. US increase in rate of interest verses the strong Indian economy. The only stable investment area is the BRICKS. Strong and stable INR would be what FII/FPI investors would be looking from India to hold on their investments or bring in more money. Developed world investors would have investment surplus as bond markets there would no longer be attractive and some of that funds will seek better returns elsewhere. If that can be guaranteed then expect India to be the preferred investment destination in the world. This itself can fuel and appreciate INR. 

What you always want may not be what you get. INR appreciation is only a wishful thinking at least for next 6-9 months. There could be temporary pull back, but INR would have only consistent direction which is bearish. India EXIM trade have been shrinking and from next quarter statistically it may look better but in actual terms it most likely would decline. The evil lies in the China adjustment and cooling down of the commodities affecting parts of the world resulting in lower global EXIM Trade. To maintain next year target of exports strong INR is not desirable. We are in catch-22 situation where depreciate rupee would also lead to outflow of FII/FPI money thereby resulting in more than incremental depreciation of INR. 

YUAN will also affect INR. Expect some intermittent interventions from People’s Bank of China to buoy YUAN but its direction would be to achieve lower and lower levels at least for next one year. China needs that to maintain their exports and help GDP to grow at 6.5% next year. Since other emerging markets and most of Asia would have currency depreciation on the cards due to US rate hike and lower oil and metal prices, china would have no choice but let YUAN also depreciates. As per ACE MACRO GAZER analysis YUAN would depreciate by about 4-6% against USD in next 12 months. 

Where does this leave India? Can we afford appreciating currency? In the first place since outflows would outpace inflows in this energy importing country, we would not have instruments to keep INR buoyant. RBI would have to use the reserves built over last two years selectively and to keep the currency volatility on check and let the INR depreciate naturally. Secondly, depreciation of Rupee in any case should be required element for India to remain export competitive and help achieve 7.4% GDP growth next year.

Therefore INR would be depreciating next year with some bouts of appreciation. We estimate that INR would decline by 3-4% in next 12 months against USD. This could be more if reforms remain a casualty in political deadlock in India.

Ace AgriCom is an international company engaged in providing consultancy and end to end support for procurement funding, hedging ( including forex hedging) and logistics for agri, metals and bullion markets. Please contact us for personalised services. contact@aceagri.com. We believe in broader macro and fundamental analysis of the commodities and do not want to get trapped in short term analysis. 

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