FxWirePro: INR’s softness to ease on narrowed trade deficit, more upside traction on cards as GST revival to stimulate exports – Bid NDFs or RKOs on expensive IV skews

The weaker US dollar and positive cues from domestic equity market would help the rupee strengthen. The rupee resumed higher by 18 paise at 64.75 per dollar as against last Friday's closing level of 64.93 at the Interbank Forex Market (Forex) market.

FxWirePro's hourly USD spot index is steady but little weaker flashing -19 (bearish) while articulating at 10:34 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

Indian September trade numbers provided further encouraging news for the Indian economy. Exports surged nearly 26% YoY while imports rose 18.1% YoY. The trade deficit narrowed slightly to just under USD 9bn. There were fears that the GST roll-out in July could weigh on exports as GST refunds are delayed or blocked.

However, the government has taken steps to ease the GST rules for exporters to speed up refunds. This ensures exporters take full advantage of the stronger growth backdrop. The strong export numbers follow the better than expected industrial production for August last week. This should help the economy recover in H2 2017 after the weak H1’2017.

USDINR fell 0.7% last week to just under 65.00. It was the first weekly decline in four weeks after rising to the 66.00 level at one point. Net foreign portfolio flows will remain a key driver while signs of stabilization in the underlying growth picture should also provide some relief for INR after the recent sell-off.

FDI flows will likely continue to support the modest current account deficit. Higher FPI limits provide some additional space for foreign inflows, especially in corporate bonds. However, given the risks of the substantial inflows into local bonds this year ($20bn) reversing, we prefer downside option structures to NDFs exposure.

Based on the position of volatility to its one-year range and carry costs, volatility is particularly cheap in the RUB but expensive in INR.

Fading the recent depreciation and selling volatility in a limited loss structure (if bond outflows reverse it could be very negative) is preferred over outright short USDINR NDFs. Alternatively, USDINR 3m put spreads are recommended using strikes at 65 with a knock-out at 63.5.