Indian Rupee, USD / INR, RBI, Coronavirus, Cairn Energy Plc, Technical Analysis – Talking Points
- Indian rupee has strengthened lately despite local coronavirus outbreak
- Flood of dollars in Indian banking system amid tax dispute boosted INR yields
- Rupee remains at risk as USD / INR appears to trade in a declining corner
The Indian rupee has performed remarkably well in recent weeks given the recent deadly wave of coronavirus in India. More than 400,000 cases were reported earlier this week, a record. This risks casting cold water on expectations of stellar economic growth. The International Monetary Fund recently estimated that the country could experience a breathtaking 12.5% ​​GDP growth rate this year.
It should be noted that while India is experiencing bleak conditions, the daily growth rate of cases has slowed – see graph below. That said, the numbers are still high. The Nifty 50, the country’s benchmark stock index, remains unbalanced on balance. While prices haven’t sold out, the Nifty has been consolidating since January. What could explain the divergence between price action and the Covid business?
INR / USD, 50 astute cases against Indian Covid
On the one hand, Prime Minister Narendra Modi has been reluctant to take drastic measures, such as a nationwide lockdown. He noted that states should only consider lockdowns as a last resort. Meanwhile, the Reserve Bank of India (RBI) just announced additional emergency measures to help support the economy. One of these includes a second tranche of bond purchases totaling around INR 350 billion.
The RBI also announced a “liquidity on squeeze” window worth around INR 500 billion to provide credit to health services and vaccine manufacturers. Governor Shaktikanta Das noted that the outlook is very uncertain and that the central bank is in “combat readiness”. The central bank’s action helps lower longer-term sovereign debt yields, thereby preventing default problems.
These can keep the risk appetite intact, which is important for the sentiment sensitive rupee. That said, the USD / INR has been on a wild ride lately. Last month, the pair soared amid a very accommodative RBI monetary policy announcement that chilled tapering hopes. Now the pair is declining quite rapidly. This could be due to a temporary glut of dollars in the banking system.
According to Bloomberg, the government has asked state banks to protect their dollar deposits due to a tax dispute. There are fears that Cairn Energy Plc, a UK-based oil and gas exploration company, may decide to seize India’s offshore assets following an arbitration decision. As a result, state banks held back receiving the USD in the futures market, yields soared, in favor of the Indian rupee – see chart below.
The RBI’s emergency measures appear to cool these short-term premiums, so the rupee’s momentum could slow as the nation remains in a vulnerable state. Coming up, India’s CPI report due on May 12e. High price pressures have probably prevented the central bank from cutting benchmark interest rates. Inflation is expected to slow in April to around 4.1% year-on-year from 5.5%. Still high CPI readings could risk rekindle the woes of stagflation, especially if growth is vulnerable.
Technical Analysis of Indian Rupee
USD / INR seems to be trading in a bullish environment Drop wedge chart template. A break above could open the door for a recovery from the February low. The overall technical outlook remains bullish, with the pair being guided higher by higher support from 2011. The 50-day Simple Moving Average (SMA) may put the focus back on the upside. Otherwise, closing below could open the door to a test of the long term trendline.
USD / INR daily chart
USD / INR Chart Created in TradingView
— Written by Daniel Dubrovniksky, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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