March inflation came in at a paltry 5.96%, still high by any other standards, but much lower than last month’s 6.84% and lower than consensus estimate of 6.27%. The falling inflation is welcomed as India’s Central Bank has cut rates twice in 2013 in order to beef up the local struggling economy. With the next policy decision coming on 3rd May, the lower inflation rate will provide scope for the Central Bank to bring borrowing costs lower. However, the Rupee did not fall due to a stronger case for rate cut, but instead strengthened and broke 54.50 post announcement.
Part of the reason is due to the fact that Governor Subbarao maintained that inflation remains “stubborn”. Consumer inflation of India still remain high, above double digits, which will continue to severely shackle RBI’s ability for rate cuts as RBI remain cautious especially since the Commerce Ministry has also revised Jan inflation from 6.62% to 7.31% today.
From a technical point of view, USD/INR has fallen below the rising trendline, and is in the midst of testing the same line again. If price is unable to break higher, we could see acceleration towards the downside to bring price close to 54.45 and potentially back to recent April 12th’s swing low of 54.20. Stochastic readings suggest that price is still in the midst of a bear cycle, and the recent recovery post fall has failed to swing reading’s direction.
A wedge is formed via the weekly chart, and current price is trading right in the center of the wedge. Looking at the previous trough via stochastic readings which is in line with a bounce from the bottom wedge, price may be able to test upper wedge despite current bearish candle if the bounce from last week is still in play. Nonetheless, with the apex of the wedge drawing closer, we could see price potentially being forced higher or lower from a technical perspective, which may coincide with the RBI rate decision date. With a fundamental push, we could easily see price breaking the wedge in either direction, with good follow-through after the breakout.
Nonetheless, on a longer-term basis, upside bulls will still need to re-test swing high of Jan for a stronger bullish initiative (though breaking Mar highs will certainly help in gathering bullish momentum), while bears will need to break Feb lows for a show of strength for further push lower.
Fundamentally, Indian economy is not in good shape. The decreasing inflation seen today in Wholesale prices is a sign that local consumption is not healthy. GDP is expected to grow at 5% in 2013, the weakest in a decade. This depressing outlook will continue to weigh on Rupee in the long-term and result in higher USD/INR especially if RBI start to push its repurchase rate below 7.5%. Nonetheless, despite this negative outlook, Rupee may still yet gain the upper hand if USD weakness continue to grow due to further expectations of QE3 continuation. Looking at the relatively muted response to a 40 month low inflation rate, it is highly likely that USD/INR may take cues from USD more so than India’s fundamentals, which may push USD/INR lower despite current woes around the Indian peninsular.
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