Rupee hits a new low against the Greenback today despite USD not being mostly flat against a basket of major currencies on a D/D basis. Therefore, it is clear that USD/INR new highs are due to INR weakness alone. This is not new, but is nonetheless worrying for RBI especially since the Indian Government has just announced the approval of new infrastructure projects worth around $28.5 Billion USD. In theory, this move would have helped the Indian economy a little as additional spending by the Government will trickle down to the rest of the market, pushing up economic growth and at the same time ensuring more residents are employed and thus higher spending power. Even though it is unlikely that a mere $28.5 Billion injection will be enough to make up for the slowdown of the Indian economy, this in itself is not a bad plan, and should have allowed Rupee to strengthen slightly if not maintain itself at the previous levels.
The collapse of Rupee today despite the new announcement suggest that market is far from convinced. Firstly, the market is not convinced that the Indian Government will be able to finance the new project adequately. The Finance Minister’s reassurance that the fiscal deficit targets won’t be breached is being interpreted as a classic “liar’s tell”. Secondly, by continuing introducing smaller measures such as this rather than tackle the bull by its horns, RBI and the Indian Government are losing “street cred”, which sent Rupee packing lower. Just like how a person seems smart until they start talking, some parts of the markets believed that RBI will be able to resolve the current crisis until they start yapping away on small doses of remedies, showing the rest of the world what they are truly made of. Ironically, it seems that all the liquidity tightening measures and additional Government spending end up hurting the Rupee instead.
From a technical perspective, USD/INR has broken away from the rising Channel, with a fresh breakout from the previous 65.80 swing high last week. Price could still pullback slightly, but is likely to be supported by the rising Channel Top, allowing price to straddle higher despite Stochastic readings showing signs of Overbought.
Looking at Daily Chart, there isn’t any much references other than the 161.8% Fibonacci Extension referencing from the rally from May to early August. Some may question the relevance of using this High/Low range, but looking at past price action, price action has seen important turning points retrospectively from this Fib Retracement. As such, the extension may help to give us some rough idea on where prices may potentially pullback if current bull trend continues.