USD/INR – 3rd Rate Cut in 2013 for RBI

The Reserve Bank of India lowered its repo rate by 25bps in its latest round of decision making today. RBI said that it sees “little space for further monetary easing” after the 3rd rate cut in 2013, suggesting that this may be one of the last if not the final rate cut that we are seeing for 2013. Governor Subbarao has many issues on his plate right now – inflation remains high despite wholesale prices hitting a 40 month low back in March. India is also running a record current-account deficit just when the country is expected to expand the slowest in a decade. With that in mind, RBI cannot afford to lower rates too much at one go, but instead have to resort to smaller cuts in rates each time, which explained the 3 cuts in 4 months.

Unfortunately, small cuts may not necessary cut it, with RBI saying it themselves. Without the Government cutting expenditures and increasing public investments, it is highly unlikely that India will be able to get itself out of the rut. Market agrees with this outlook, with the Sensex stock index trading lower following the announcement.

Weekly Chart

As for the currency, USD/INR is currently close to the apex of current triangle. Price has strayed into current Kumo and is kept afloat by the Kumo’s buoyancy. A bearish breakout can be confirmed should price manage to break below 2013 lows which is the confluence with current Senkou Span B (Kumo bottom). We’re also looking at the onset of a bearish Kumo twist, which is in line with this bearish breakout scenario. Stochastic readings are also pointing lower with an interim peak forming, suggesting that price may seek lower pastures soon.

A strengthening INR flies in the face of convention understanding where the demand of a fiat currency will decrease should the associated economy is weak, resulting in weaker valuation. However, now is certainly not normal times with easing and money printing activities spotted all over the globe. Despite recent rate cuts, the rupee’s repo rate stands at 7.00%, more than double that AUD and one of the highest within G20. As such, demand of INR will remain strong, and with RBI’s hands being shackled, future rate cuts may not be forthright which will be beneficial for those who wish to escape EUR and USD.

With NFP coming up today, a break of USD/INR may be formed should NFP numbers turn out to be bearish for the USD. Traders should keep watch on price action should that happens to determine if the breakout may be sustainable. With strong follow through, we could potentially usher in new lows for 2013, with bearish objectives around 51.8 and 50.0 round number if bearish momentum takes flight.

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