USD / INR – RBI Cut Rate by 25bps: Reaction

Reserve Bank of India slashed the short term lending (repo) rate by 0.25% to 7.75% during its latest meeting. This move was widely anticipated, and some analysts who called a 0.50% cut will be disappointed. So did the market apparently, as INR strengthened when the rate cut was announced, falling back to the trading range last week.

Hourly Chart

A large part of the reason why INR strengthened is due to the quarterly report issued 1 day prior, in which RBI expressed its concerns with inflation, saying “suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materializes, inflation path may turn stick.” To complicate matters, RBI also said that “sustained commitment to fiscal consolidation is needed to generate monetary space”.

To summarize, RBI is saying – Inflation too high, even if it is not so high, we’re broke.

As a result of which, market players believed that this could be the last rate cut in a long while more. We had to wait for 9 months for this rate cut. The next one could be an even longer wait.

Daily Chart

Daily chart shows an evening star that has just formed under the 54.10 support, opening up 51.2 as an eventual downside target. Stochastic readings is also showing a cross between the Stoch and the Signal line, giving us some legroom for bears to stretch before entering the Oversold region – in line with interim support around 53.5 region.

RBI should be happy after this round of rate cuts. They have managed to ease with INR strengthening, which acts as a mitigating factor against inflation risk. On top of slashing the repo rate, RBI also cut the cash reserve ratio requirement of banks from 4.25% to 4%, equating to injecting additional 180 billion rupee into the market – assuming that the banks will be utilizing the liquidity that is. Fundamentally, we could see a revival in INR as the easing measures aid India’s economic recovery, and encouraging more foreign funds into her shores as global investors seek higher alpha.

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