Little has changed since new RBI Governor Rajan has taken over, but that has not stopped Indian Rupee from appreciating, with prices currently breaching below the key rising Channel Top (see weekly chart below) and will close below it if we continue to stay around current levels. The reason for the increase in strength is due to market expectations that Rajan will continue to raise rates in the near future. RBI has surprised the market last Friday with a repo rate hike when everybody was expecting a cut of the Marginal Standing Facility (MSF) rate in order to improve liquidity. Furthermore, there are reports suggesting that RBI may use consumer-price inflation as their main inflation gauge moving forward. This in itself does not mean anything much, but considering Rajan’s hawkishness, appears to be a move to justify further policy rate hikes as the consumer inflation numbers have been consistently moving higher while the traditional inflation gauge (using wholesale numbers) are gently declining due to the economic slowdown.
This is actually a good move, as RBI is tackling the inflation monster head on. However, with market pricing in higher rates, the economy will tank lower further. In response to this, Rajan has opted to inject 1.5 Trillion Rupee into the financial system everyday, and promised to engage in open market operations to ensure adequate liquidity. Will this be enough? Nobody really knows right now. Furthermore, all these are simply paper talk and there is very little action happening right now. But at least for now, it seems that market is believing in Rajan and his master plan to save both Rupee and the economy.
This is clearly evident via price action where prices have moved back to last Friday levels, before the puzzling RBI rate hike that pushed Rupee lower. Sentiment has now been reverted to one that of trust, and allowing USD/INR to continuing trading lower even though USD is actually trading higher, beating all major currencies except for CHF. Should USD weaken again, we could potentially see even faster decline in USD/INR which may bring us back down below the 61.30 (post FOMC announcement low).
From a pure technical perspective, prices have pushed out from the descending Channel top, coinciding with Stochastic readings pushing higher with a bullish cycle signal. However, it is unlikely that prices will be able to breach the 62.25 post RBI rate hike consolidation level as readings will most likely be within the Overbought region when that happens.
Price is also bearish via the weekly chart especially if we start Monday off with a quick bearish gap. However, it is likely that we will find support via the consolidation range between 59.0 – 61.25 as it is likely that Stoch levels will most likely hit Oversold when that happen. Furthermore, a technical pullback should be expected after such a strong and continuous bearish move from 69.0. As long as the rebound/pullback does not trade above the rising Channel, the likelihood of a move towards Channel Bottom will remain.
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