The Rupee continues to trade above 59.0 despite all the minor liquidity tightening restrictions placed by RBI. It is clear that all these measures aren’t doing a great deal, with the breakout of 20th June still in play. Things are not looking great moving forward either. Moody’s just issued a statement on India this morning, saying that India’s high interest rates will almost certainly result in a weaker/slower economy. Such a statement borders along “Captain Obvious” territory, but nonetheless is a important reminder of the dire situation RBI find themselves in. A high interest rate is not welcomed as this would be an increased burden on local firms that will face high borrowing costs, increasing their likelihood of failing in such a depressed economy. However, should If they choose to lower interest rates to help their economy, Rupee will certainly weaken further, which will result in a capital flight away from their economy due to higher inflation risks. It is highly unlikely that foreign funds would want to hold onto to Rupee denominated assets given that inflation rates are already incredibly high. Cutting rates will only result in widening the gap between returns and inflation loss. In this case, the path to the road of economic meltdown is slower, but the economy long term outlook is the same as not cutting rates.
Hence the answer for Indian’s problem is not in interest rate policies, but perhaps via other non-conventional monetary policy. However, that may be yet another bridge too far for RBI to cross. With Government current account showing a deficit, there really isn’t any cash available for RBI to embark any sort of multi-year stimulus that is needed. In theory the Central Bank could simply print more money but that would only simply erode current Rupee further, which has been explained earlier that the long-term route for a weak rupee = economic meltdown. Or perhaps, funds can be raised by issuing long-term bonds to other sovereign nations, however the terms would be extremely onerous, and may threaten the autonomy of India (see Cyprus and Greece). Furthermore, there is no obligations for other countries to step in and help India, and there isn’t a framework within BRIC or even Asia for economic coorporation like that Euro-Zone. Hence the higher likelihood for India’s economy and by connection Rupee would be one that is either spiraling down quickly or spiraling down in a slower fashion. Either way, Rupee’s outlook is bearish with very little chance of recovery.
From a technical perspective, price did manage to break the rising trendline, which is a good sign for further bearish movements. The bullish recovery found on 18-19th July resulted only in a bearish rejection of the trendline with an Evening Star formed. This put price in a good position to move back towards 59.0 in the next few candles or so. However, beyond 59.0 is a different ball game altogether, with Stoch readings already closing to the Oversold region, and is likely to encroach below 20.0 when 59.0 is tagged. Looking at historical readings, Stoch curve tend to rebound on or slightly above 20.0, hence it should not be surprising to see 59.0 holding despite the failure to climb back above the rising trendline.
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