Dollar upside risk lower post withholding tax cut: JPMorgan

JPMorgan says the move by the Indian government to cut the tax on interest earned by foreigners investing in domestic debt should help bring in around $5.2 billion into domestic debt and more importantly reduce the upside for the US dollar against the Indian rupee.

JP Morgan recommends selling a six-month US dollar call against Indian rupee put struck at 57 for a break-even of 58.

The investment bank is, however, wary of adding tactical short positions on the pair at this point as the foreign institutional investor quota system continues to remain a hassle and can put off investors from investing in onshore India bonds.

"For us, it would take more signals of fundamental improvement of both the current account deficit, reduced inflation deterioration of REER valuations, as well external funding to convince us to add to core shorts at these levels," the bank says in a note.

Copyright: Thomson Reuters 2013