The Indian Rupee has appreciated the most in quarter-1 of 2011. The Indian Rupee weakened during January and hit a low of 46.01 on huge selling by foreign funds and weak euro on political problems in Euro zone. Foreign funds had sold more than $ 924 million worth of shares in Jan 2011. Dollar traded higher during the start of the year on safe haven buying amid turmoil in MENA region and lingering Euro zone debt and political problems. However, fiscal problems in US started to weight on dollar and higher inflation figures in UK and Euro zone pulled back Euro and Pound pushing dollar to multi-months low. Fed has kept borrowing costs at a record low and said it would continue $600 billion in bond purchases through June which makes dollar weak due to interest rate differential. In March, the INR temporarily deviated from a 1.5 month strengthening trend due to risk aversion driven off Japan’s natural disaster.
This proved to be only temporary as in late March, the INR appreciated to its strongest level since November of 2010 and appreciating further to 43.97 in April, reflecting a normalization in market conditions and a refocusing on India’s hawkish monetary policy bent and strong growth. The Reserve Bank of India (RBI) has hiked the benchmark repo rate seven times in the past twelve months for a

cumulative 200 basis points to 6.75%. The RBI’s main concern is a buildup in inflation expectations with the economy operating close to full capacity. The central bank will likely feel obliged to raise rates at least once more in 2011 as it awaits clearer signs of inflation abatement.
The rest of this year should see large swings in currencies. Namely, in the US: how will the Federal Reserve deal with the expiry of QE2 and will it provide hints of QE3. QE3 does not look likely with improving data from US. Only major concern with US remains the budget deficit which is to pull dollar down. In Europe: will Europe maintain its resolve to bailout the PIGS (Portugal, Ireland, Greece and Spain) and how long will markets ignore the sovereign problems and in Japan: how will Japan fiscally cope with the devastation from the terrible earthquake and tsunami of March 11? How will emerging markets tackle with rising inflation, higher dollar demand for importing crude oil with the crude prices at all time high?
The Indian growth story remains intact leading to the flow of money to the country with high interest rates as well as good growth prospects. The economy recorded a solid 8.7% gain in 2010 with private spending on an upturn, underpinned by abundant bank credit availability. The country is record growth of above 8% in 2011 and 2012 also. The central bank will keep raising rates to maintain a balance between inflation and growth. If inflows remain strong, we could see rupee rising more.
Technical Outlook:

Indian Rupee is to appreciate in the second quarter also mainly supported by falling dollar. Dollar Index can gain some temporary support at 70 levels. But in long run, dollar index is heading towards 62 levels on break and close below 70.69. This can lead to the huge INR appreciation. The INR can appreciate to levels below 43. However, huge dollar demand from oil importers and timely intervention from RBI to protect exporters will slow down the INR appreciation.
From CMP (44.22), 44.15 is strongest support. Break and Close below 44.15 will lead to the INR appreciation to 43.87 and 42.25 levels. Similarly, 44.70 is the strongest support, close and break above this level will lead to the deprecation to 45.32 and 45.68

May 2011

Source : Bullion Bulletin