Yesterday two pieces of price data in the US came in higher than expectations (Core PCE price index and ISM manufacturing prices), this could be an early signal for July price data to buck the trend of lower than expected inflation and provide a much needed technical correction to the dollar weakness. NFP wage earning on Friday would verify the possibility.
Today we have the RBI monetary policy which has been mostly a surprise under the new governor. The market is expecting a 25bps cut with a neutral stance and the same is totally priced in. To me a 25bps cut with a hawkish tone looks illogical. Small portion of the market is also expecting not cut or 50 bps cut. To reiterate I am in the 50 bps cut camp, with a neutral tone for the future, as RBI would not want the market to carry further rate cut expectation given the current and foreseeable high real rates. This could drive USDINR lower to 63.75 but I won’t chase the pair downwards as buying can start given that under such scenario India yields would fall and bottom out. A 50 bps cut could trigger a 15bps fall in 1 year forwards. No cut could drive USDINR to 64.35 where it can be shorted as high real rates story would start playing out in such a scenario, although I strongly don’t have this view.
USDINR 1m NDF is 7.5 p left but EM currencies have depreciated in the last 2 days. USDINR at current levels is trading 20p left to the EM basket (for the last 2 days). Debt inflows continue to find the last remaining limit windows while FIIs seem to be booking profit in equity markets. At some point of time in the next 3 months RBI could increase the debt limits which could be the next trigger for USDINR to head lower towards 63 levels. Otherwise the medium term view remains of range only. In June 2017 RBI net forwards increased by 3.5bn USD on the long side to USD 19.2 bn, indicating the authorities discomfort with INR appreciation from here. CMP 64.11, Range 63.75-64.20.
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