Reserve Bank of India cut its benchmark repo rate by 25 bps to 7.50% today, meeting market expectations. This is the 2nd time the Central Bank has slash rates in 2013, though the Cash Reserve Ratio was sparred this time round, with RBI choosing to keep it at 4%. Despite cutting rates, RBI issued a warning stating that further monetary easing may be limited due to persistent inflation risks, which send the Sensex stocks index down lower.
Fundamentally, it is interesting to see RBI caving to public pressure for a 2nd rate cut in 2013. Inflation rates remained sticky with the latest Jan figures coming in at 11.6%. We’re certainly heading in the wrong direction as inflation is concern and the rate cut will definitely not help RBI keep stability in prices. Also, it remains to be seen if rate cuts will be beneficial for the economy. In an ideal situation, banks will pass on the entire rate cut savings to end consumers, resulting in more borrowings and higher spending – a recipe that will help to spur economic activities. However, there are signs that Indian banks are finding difficulty raising deposits to fund loans. Looking at RBI data, the 6 month period between August 2012 to Feb 2013, banks managed to raise deposits worth Rs 269,350 crore while lending out Rs 394,090 crore. The additional financing comes from selling Government securities and that is not a sustainable model for banks to work on. As it is, they are required to maintain a 4% CRR and 23% Liquidity Ratio for every dollar raised through deposits, and it will be hard for banks to continue seeking more deposits should they slash interest rates, and also when personal savings per capital in India is falling. As such, slashing rates may only result in cost savings for banks and do very little to stimulate the ailing economy, which is growing at its slowest in a decade around 5% for current fiscal year.
Unlike Stocks, the outlook for Rupee is mixed despite clear guidance from RBI. Limitation on RBI for future rate cuts is long-term bullish for the Rupee, but the declining economic outlook for India will weigh Rupee down. As such, this struggle is best reflected in USD/INR which is finding limited bullish follow-through post RBI announcement. Price has broke the descending Kumo, but has failed to close above the previous swing high on 18th Mar. Even though the forward Kumo is hinting at a bullish twist, Kumo direction is still down and that will continue to weigh on price.
Daily Chart is more bullish as price is looking to be head and shoulders (read Wick and Close) above the previous 3 candles. Price peeking above the current Kumo is also a good bullish sign, though preferably a break above the Kijuu-Sen which is the confluence with early Jan floor may be a stronger bullish signal. Stochastic appears to be bottoming out as well, which will lend support to Senkou Span B (Kumo top) against pullbacks.
Cyprus may yet play a part in this as well. Rupee has a high beta due to high interest rates and also being an exotic currency, any fall in risk appetite will weaken Rupee and strengthen USD due to safe-haven flows. Also, should Euro-Zone slip back into disarray, India’s economic woes will almost certainly deepens as well, making the next few days critical to see if USD/INR can continue its upward trajectory or perhaps enjoy a short trip below the Kumo once again.
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