USD/INR rally strongly today following the Reserve Bank of India rate decision, in which they held the key repo rate at 7.25%. This decline in Rupee is highly interesting, as RBI was never expected to hike the key interest rate to begin with, as India’s economy is already heavily battered, with further liquidity tightening measures to prop up the Rupee hurting the economy even more. Hence, a rate hike this time round is entirely out of the question. Therefore, the subsequent rally in USD/INR following the decision announcement is a huge sign that the Rupee is currently extremely bearish. These bears have been lying in wait for RBI to confirm its non-hiking decision before buying into USD/INR again, and now that the event risk is over, they have free reign to send USD/INR higher with little to no resistance.
Some traders may point to the fact that the decline is actually due to “dovish” guidance by RBI, alluding to the fact that RBI said the tightening measures enacted 2 weeks ago “will be rolled back in a calibrated manner” once stability is restored to the market. However, it is unlikely that market expected the measures to be left there forever, as they were always temporary in nature. Furthermore, even if RBI wanted to remove the tightening measure, they will not be able to do it now as it is clear that volatility of Rupee is far from over. Hence it is difficult to allocate the huge impact of Rupee on this “dovish” talk of RBI. If anything, this only go to show that the Rupee bears are finding any flimsy reason to sell the currency.
From a technical perspective, price has now rallied back above the Kumo, affirming the Kumo as a viable support moving forward and opening up 61.4 as the next level bullish target. Stochastic readings have also pushed up higher, showing a strong bullish cycle despite never entering the Oversold region in recent weeks. All these point to a strong movement higher for USD/INR moving forward.
Fundamentally, RBI has also downgraded its full year growth outlook, cutting GDP growth forecast to 5.5% from a previous 5.7%. This also supports the case for a weaker Rupee moving forward. Furthermore, the decline in USD/INR seen last week was mostly driven by the weakness in USD. Now that USD strength is slowly gaining back, the winds will be in favor of USD/INR bulls, providing yet another nail for Rupee’s coffin.