Indian Rupee strengthened once again early today after the Government raised FDI cap in key sectors in bid to stabilize Rupee. However, as with all its recent attempts – raising rates of marginal facility window, buying rupee in secondary market via agent banks, this failed to invoke any lasting impact, with price trading back higher easily once more.
It seems that RBI is only doing this because they have mistaken that the declining INR is purely due to speculation, and them restricting liquidity is a good way to stop speculation. However, the RBI has failed to recognize that INR weakness is not due to speculative actions (as a side note, I highly doubt speculators would like to short INR on a speculative basis with a -7% carry), but due to the structural economic issue – ergo, the fact that INR economy is going into the pits right now. By providing such restrictive measures to prop up INR, RBI hopes that global confidence in its treasuries and bonds will return, encouraging further investment. However, by restricting liquidity in various forms, RBI is pushing the worsening economy deeper lower, which will end up driving foreign investments away during a period when willingness to invest in India is already low with inflation rates in double digits.What this means is that no matter what RBI does to help INR now, it is unlikely that USD/INR will stay lower for long, and recovery to higher grounds can be reasonably expected as evident in the past.
From a technical perspective, support 59.0 is holding up nicely. Stochastic readings are currently still above Oversold region, which usually should imply that price would be able to head lower for a bit more. However, looking at previous major troughs, all of them happened just above the 20.0 mark, which implies that there is a possibility for a trough to be form here as well, lending strength to the 59.0 support. Furthermore, even if price does break 59.0 from here, stochastic readings would be deep within the Oversold region and it is unlikely that price will be able to break the 57.4 – 58.4 consolidation on shaky fundamentals.
Prospect for Rupee is not looking great, RBI is basically between a rock and a hard place. Strengthen Rupee further unnaturally, and the already weakened currency may collapse when the economy give way. Leaving it as it is now, may result in further deterioration of the currency due to USD strengthening coupled with the fact that confidence in the Indian economy is almost nonexistence currently. The best RBI can hope for now is to steady the economic ship, and allow foreign investors confidence to build up and INR will naturally improve. Alternatively, if Bernanke starts to shoot his mouth off during today’s and tomorrow’s testimony session with House and Senate, USD may weaken to such an extend that USD/INR may be able to break 59.0. That however is an unlikely scenario, and even if it happens, we may see USD/INR bulls strong enough to rebuff any decline which was exactly what happened last Wednesday.