Are Central Banks trying to one up each other? First we have FOMC not tapering stimulus as expected, and now RBI has done the same by raising key policy rate instead of cutting as expected. It seems as though that major Central Banks are trying to see how much they can outdo one another by surprising the market.
Jokes aside, the move by RBI is indeed a strange one. Market was expecting a loosening of monetary policy in order to encourage economic growth, and the signs for a cut were good. FOMC announcement drove USD weaker, giving RBI buffer for Rupee weakness if loose monetary policies were implemented. Furthermore, RBI Governor Rajan’s postponement of Wednesday’s original scheduled date to today was seen as a sign that he would like to wait for the FOMC outcome and determine how much he can loosen policies. Unfortunately, it seems that the roles have reversed – the one that was expected to tightened ended up not doing so, and the one expected to loosen ended up tightening instead.
However, RBI’s decision is not totally unreasonable, as Governor Rajan may have felt that defending Rupee should be the first and foremost priority, and by raising repo rate and increasing the cost of borrowing, inflation should fall in theory and the higher interest rates should attract higher deposit rates from non-resident Indians living abroad. Furthermore, right now may not be the best timing for RBI to ease, as Rupee is still relatively unstable. Hence shoring up Rupee right now does not seem like such a bad idea, provided that future loosening measures are implemented.
5 Minutes Chart
Things didn’t go as planned though, for USD/INR actually traded higher following the announcement. It seems that market is focusing on the economic downside with a tightening move. It’s well known that Rupee weakness is a result of not just high inflation, but also due to the weakening economy unable to out grow the inflation rate. This resulted in the outflow of funds from India and thus an extremely weak Rupee. Perhaps RBI wanted to make use of current USD weakness and USD/INR bearish momentum and drive USD/INR even lower, but unfortunately this is the worst result possible – twisting the knife for the economy and driving Rupee weaker instead of strengthening it.
This is indeed bad news as technicals is sitting precariously on the ascending Channel Top right now, with prices having the potential to go either way. Currently it is still hard to tell where price is headed, but certainly current short-term weakness in Rupee is favoring a longer term correction towards 2013 Highs once again. However, traders may wish to wait for further confirmation as long-term trendlines are never precise, with a huge potential margin of error. Hence prudent traders may wish to wait for next week’s price action and see current short-term momentum has legs to run further or not.
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