Despite the 3rd round of FX tightening measures enacted by Central Bank RBI last week, Rupee continue to remain weak, with prices continuing to stay close to the rising Channel Top. Prices did manage to dip lower insofar to the floor of current consolidation zone around 60.5, but the losses were quickly reversed yesterday, with prices breaking above Channel Top, reaching a high of 61.75 before today’s sell-off send prices back within the rising Channel.
This reaction cannot be described as surprising as the previous 2 rounds of tightening measures, namely the rate hike of 2% for MSF and banks’ borrowing cap, failed to impress the markets. Hence, this 3rd round of tightening measure which involves additional cash management bills issuance – expected to be sold at 11.95%, will drive rates higher and hence increasing negative carry costs of shorting rupee – has an even weaker impact to drive Rupee higher. This is because cash management bills only affect costs of financing for banks indirectly. MSF Rate Hike, and Banks’ borrowing Caps impacts Bank rates directly, and that didn’t work, so why do we expect an indirect tightening measure to work now? It seems that RBI is really clutching at straws right now, and the market is sensing desperation from the Central Bank, resulting in the strong rally seen.
However, it seems that Rupee bears may not be in full control currently. There remains a high number of offers just above the rising Channel Top, most likely from Carry Traders finding value from shorting USD/INR at record highs. Nonetheless, if RBI do not address the major issue surrounding its currency right now – ergo the current account deficit and economic growth slowdown – but instead continue to mess around with small policy changes, it is unlikely that carry traders will be able to stem the tide brought about by the rotting economic issues.
Case in point – recent tightening measures failed to strengthen Rupee, but instead weakened India’s fixed income markets, resulting in quick outflow of funds. Hence, if RBI continue to do this (a hallmark of insanity – repeating the same action hoping for a different result), we would reach a tipping point where a spectacular collapse may happen either by RBI’s own doing or by virtue of RBI not addressing the root issues. Whatever the cause may be, USD/INR current long-term outlook remains broadly higher, and Carry traders entering early may end up on the wrong end of their trades eventually. Even if Channel Top continue to hold, it is possible that price may still continue to straddle higher along the trendline, and these early Carry Traders will certainly be spook if the swing high of 62.18 is reached once again.
From a technical point of view, Stochastic readings are still pointing higher, with a trough forming at a level where previous troughs have been seen back in mid June and early July. Hence, do not simply assume that the holding of Channel Top would open up a long-term bearish target of Channel Bottom, especially given the fundamental backdrop right now.