We advise selling USDINR 1m NDF at 68.36, with a target around the previous range prior to the recent spike at 67.00 (+ 1.98%) and a stop above the previous highs at 69.50 (1.14%).  The trade horizon is 2-4 weeks and the trade has positive carry of 39bp/month.

The main rationale for upholding this trade is that the shorts in USDINR near highs on getting past of outflows  USDINR has rallied by 2.8% since the November 8 close (the night of US elections and also India’s announcement of demonetization of high-value currency bills) and briefly touched all time highs on November 24.

Moreover, India has suffered significant outflows in November - with FCNR outflows estimated at $13bn (see: India-FCNR outflows around the corner) in addition to portfolio outflows at $5bn, but the worst should be over for FCNR outflows.

The RBI hiked incremental CRR to 100% in an effort to mop up INR3.2tn liquidity along with steps to increase MSS (market stabilization scheme) limits to withdraw medium term liquidity should help contain INR depreciation. We believe that the RBI will continue to smooth volatility, especially on the top side, given that USDINR trades very close to the all time highs.

The recent high (at 68.86 in spot), which is also the high reached in Aug-2013 and Mar-2016 should act as a strong resistance, especially given the steep rise is indicating that USDINR is overbought. We expect USDINR to retrace back to the 66.50-67.50 area.

The risk factor is foreseen when the basket selling in Emerging Markets If emerging market currencies sell-off on global events around the OPEC meeting, Italian referendum, ECB meeting or Fed meeting, the INR might sell off from the current levels. Domestically, continued portfolio outflows would be detrimental.