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Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

Daniel Dubrovsky, Strategist

Indian Rupee, USD/INR, RBI, Coronavirus, Cairn Energy Plc, Technical Analysis - Talking Points

  • The Indian Rupee has been strengthening lately despite local coronavirus surge
  • Flood of dollars in India’s banking system amid tax dispute boosted INR yields
  • Rupee remains at risk, with USD/INR appearing to trade within a falling wedge

The Indian Rupee has been performing remarkably well in recent weeks considering India’s recent deadly wave of the coronavirus. Over 400,000 cases were reported earlier this week, a record. This risks pouring cold water on expectations of stellar economic growth. The International Monetary Fund recently estimated that the country could see a breathtaking 12.5% GDP growth rate this year.

It should be noted that while India is experiencing grim conditions, the rate of daily case growth has been slowing – see chart below. Having said that, the figures remain elevated. The Nifty 50, the nation’s benchmark stock index, remains unhinged all things considered. While prices have not sold off, the Nifty has been consolidating since January. What could explain the divergence between price action and Covid cases?

INR/USD, Nifty 50 Versus Indian Covid Cases

Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

For one thing, Prime Minister Narendra Modi has been reluctant to take drastic measures, such as a nationwide lockdown. He noted that states should only consider lockdowns as a last resort. Meanwhile, the Reserve Bank of India (RBI) just announced additional emergency measures to help support the economy. One of these items includes a second tranche of bond purchases totaling about INR350 billion.

The RBI also announced an ‘on tap liquidity’ window worth roughly INR500b to extend credit to health services and vaccine makers. Governor Shaktikanta Das noted that the outlook is highly uncertain and that the central bank stands in ‘battle readiness’. The central bank’s action is helping to pressure longer-term sovereign debt yields lower, keeping default woes at bay.

These may be keeping risk appetite intact, something that is important for the sentiment-sensitive Rupee. Having said that, USD/INR has been on a wild ride as of late. Last month, the pair soared amid a very dovish RBI monetary policy announcement that marginally cooled tapering expectations. Now, the pair is falling fairly swiftly. This could be due to a temporary glut of dollars in the banking system.

According to Bloomberg, the government told state-run banks to protect their dollar deposits due to a tax dispute. There is a concern that Cairn Energy Plc, a UK-based oil and gas exploration company, could move to seize India’s offshore assets following an arbitration ruling. As a result, state banks were holding back receiving USD in the forwards market, yields soared, benefiting the Indian Rupee – see chart below.

The RBI’s emergency measures seem to be cooling these short-term premiums, so the Rupee’s momentum could slow ahead as the nation remains in a vulnerable state. Ahead, India’s CPI report is due on May 12th. Elevated price pressures have likely been making it difficult for the central bank to reduce benchmark lending rates. Inflation is expected to slow in April to about 4.1% y/y from 5.5%. Still-elevated CPI readings could risk rekindling stagflation woes, especially if growth is vulnerable.

INR/USD Versus Rupee Forward Implied Yields

Indian Rupee Technical Analysis

USD/INR appears to be trading within a bullish Falling Wedge chart pattern. A breakout above could open the door to resuming February’s bottom. The broader technical outlook remains bullish, with the pair being guided higher by rising support from 2011. The 50-day Simple Moving Average (SMA) could reinstate the focus to the upside. Otherwise, closing under it could open the door to testing the long-term trendline.

USD/INR Daily Chart

Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

USD/INR Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.