INR - deviating from the script

This was not the script that one expected for INR. Raghuram Rajan, favorite of the markets, stepped down as RBI Governor 2 weeks back. $25-30 Billion USD of FCNR deposits maturing from September to November.

Most people expected Rupee to weaken, and justifiably so. But Rupee has managed to hold its own. Quite comfortably. And if there is even a slight uptick in markets, it will probably even strengthen!

What is going on? Yes - dollar is weak overall, because of expectations Fed is not going to raise rates - but still.

I think these are early signs that the FCNR redemption money is not deserting the country the way people were worried about for last few months. It is very much staying back in the country.

And if that money is staying back in the country, where would it most likely end up - why, the equity markets of course. The India story looks quite attractive, and especially considering how bad the situation looks elsewhere, this becomes the natural place to park the country. Even more so for Indophiles who were ready to park their money in India in 2013, a period that was probably as bad, or in some ways even worse, than the gloomy days of 1991!

If a significant portion of that money comes into Indian equities, it could potentially push markets way higher.

Watch out for the flood.

Requesting not to open multiple threads.

You can open a single thread something called "Market Analysis by Protrade" and post all your analysis on the scrips/indices in that thread.

Hearing of a very interesting reason why INR is deviating from the script. And if this is true, it good be a serious game changer for India.

It appears that there is massive liquidity crunch currently in the system. Banks were caught totally unawares by the amount of Advance Tax payments that were made last week. Because of the change in structure of Advance Tax (with 15% installment added in June), people expected that September installment of advance tax would be lower or at best be marginally better than last year.

Contrary to expectations, advance tax payments have been significantly higher than expectations. One possible explanation for this, is that 30th September is the deadline to come clean on black money. If you disclose black money by 30th September, you have to pay 45% tax on it. I suspect that people are declaring their wealth from black money as income, and prefer to pay income tax on that money at 30% instead! That saves them over 33% on the tax payable!

And when the massive amounts of liquidity was sucked outside the banking system into the governments coffers, it caused a crunch in the system. It doesn't help that the largest IPO in 6 years opened yesterday - and that is also sucking money out of the system.

In this scenario, people have been forced to sell USD for INR, in order to increase their liquidity in INR. And that has resulted in strength in INR at a time when INR was otherwise expected to weaken.

If this reasoning is true (and for that matter, even if it is not true), this could be an unexpected positive surprise for India, and would help the fiscal deficit. Already, Citigroup made a stunning report couple of days back, claiming that Q1 would see a current account surplus in India for the first time this year. We could also see very healthy situation in fiscal deficit also!

http://economictimes.indiatimes.com...in-surplus-citigroup/articleshow/54389802.cms

This could be the fuel that boosts markets. Because obviously this will be totally unexpected positive news!

This liquidity crunch was exacerbated by the banking situation last week - with one official holiday for Bakrid on Monday, but with an unofficial holiday on Tuesday, because Bakrid got shifted. Then another unofficial holiday on Wednesday for Onam. Combination of multiple factors have probably created extreme liquidity crunch in the system.

And that could also explain the low key response to the ICICI Pru IPO yesterday, with only 16% subscribed! Of course, it is a very large IPO, but still, considering that almost everyone had a positive recommendation, this was expected to be covered fully yesterday itself!

The tepid response hurt the stock yesterday and today - but once the reasons for this are apparent, the stock will hopefully react positively.

And this massive liquidity crunch could also be the explanation for recent unexpected weakness in markets. Europe up 1+% yesterday, up 0.3% today, but India is still subdued.

Today we have an interesting situation - where markets are down, but INR is strong! Typically, with FIIs being the major players, whenever markets are down, INR weakens. But today it's opposite!

The biggest IPO in 6 years. Three days where over Rs 30,000 crores have been sucked away from the market. But markets have handled it quite well.

Yes - we didn't go up much - despite some up moves in Europe and US over the last 3 days. But with this kind of money getting sucked out of the markets, just being flat is quite a big achievement.

And now that the ICICI Pru IPO is out of the way, we can go back to business as usual - and resume the rally!

And ICICI stock, which was under pressure because of worries the IPO would devolve, can also resume the rally.

BOJ announcement out of the way. Fed not expected to hike - especially because a market fall now would not be so helpful to Hillary Clinton!

Current account deficit comes in at 0.1% of GDP!!

Ha ha! Now all we need is for Janet Yellen to follow the script - and that will give markets a nice boost tomorrow!

I started seeing this trend a few days back, and was somewhat intrigued. Now this trend has become downright puzzling.

Markets have fallen two days in a row - and yesterday's fall was quite significant actually - but despite that, we are seeing INR strengthening!

FII's were actually Net sellers yesterday - and when that happens, one usually expects INR to weaken - but it strengthened.

Is INR singing a totally different song compared to what the Equity market is singing? Is it a case that Equity markets are singing a global tune, whereas INR is singing a local tune?

The economic situation in India has improved significantly - with current account deficit falling drastically - almost to the level of a surplus! And best part is that most of the fall is explained by a crash in Gold Imports - over a 75% drop actually - which is a massive positive. Unproductive imports are down, whereas productive parts of the economy are not impacted much. This is as good a situation as one can expect.

Indian Equity markets have largely been in sync with global markets for as long as any one can remember. In fact, after the painful experience of 2008, no one even talks of Decoupling. But I think we are seeing early signs of a strong divergence between local economy and global economy. This is going to raise some interesting questions.

If there is a global crash - will India manage to navigate that crash well? Or will India also crash? India desperately needs to increase the Domestic Institutional Participation in Equity markets significantly. Potentially, Pension money should come in, in a a big way.