The main idea of the trade is to buy IND and sell USD, implementing what in jargon is called a carry trade.
In the chart above we can see the 3-month trend of this risky pair, which has actually been under the spotlight in the past couple of months since Raghuram Rajan was appointed Governor of the bank of India in August. His mission -he said- was to do whatever it takes to stabilize the currency, and prevent further inflation. Since his appointment, the Rupee has gained 11 % on the dollar, from a 28th August low of 68.845 to a 61.535 on Thursday, now trading around the 61 mark, and we believe that there is still space for a downward movement in the pair. Raghuram Rajan certainly has the credibility, and on the US side a relaxation of the pressure in the rates should make the depreciation easier, now that the shutdown in the States has been resolved. At present (Friday, October 18th, 06:00 GMT), eight hours have passed since President Obama signed the bill extending the nation’s borrowing authority through February 7th.
With regards to India, the two principal markets, Sensex and Nifty are very strongly correlated with the currency. In the chart below, we can observe how INR moves accordingly with the gains in the Nifty index. The Nifty and the Sensex have gained year-to date 4.58% and 7.28 %.
We believe that India’s recovery, though slow, will be strong, and thus we think there may be room for good profit here.
As to Rajan’s view on the economy, he thinks it will pick up by year-end thanks to the start-up of billions of dollars worth of stalled resource projects and a good monsoon season that will bolster agricultural production. As to Moody’s analytics, the current economic slowdown is about to bottom out and a recovery is in sight. The Reserve Bank of India is due to review monetary policy on Oct. 29th, with a rising pace of inflation bolstering the odds of another central bank interest rate hike even as the economy stumbles through its worst crisis since 1991. Rajan already surprised the markets last month with an interest increase of 25 basis points, and we believe this could happen once more. If this were to happen, our trade would definitely be rewarding.
The right time horizon would be around 3 weeks, we would suggest to take profit once satisfied with the gain. Some of the momentum has already been lost in the first hours of the opening of the Federal Government (USDINR:-0.61%), but we suggest to enter around the 61.2 mark.
The trade is similar to that of a typical carry trade: enter an emerging market that shows good signs of recovery and an undervalued currency, keep the burden while it re-appreciates, and take profit accordingly.