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Indian Rupee Falls as RBI Holds Dovish Stance, USD/INR Eyes Support. Nifty 50 at Risk?

Indian Rupee Falls as RBI Holds Dovish Stance, USD/INR Eyes Support. Nifty 50 at Risk?

Daniel Dubrovsky, Strategist

Indian Rupee, USD/INR, Nifty 50, RBI, US NFPs, Technical Analysis - Talking Points

  • Indian Rupee weakens as RBI holds accommodative stance despite rising CPI
  • Nifty 50 initially gained. But, the vote was not unanimous, bond yields climbed
  • USD/INR facing its next technical test at key inflection point, will Nifty turn?

The Indian Rupee fell versus the US Dollar after the Reserve Bank of India (RBI) left its benchmark reverse repo rate at 4.0% in August, as expected. The central bank also voted to keep its accommodative stance, but it was not unanimous at five to one. That may have caught investors off guard as front-end Indian sovereign bond yields climbed. The central bank also extended its TLTRO plan for 3 months until December 31st.

Equities initially liked the outcome however, with India’s benchmark stock index, the Nifty 50, gaining following the monetary policy announcement. This may have been for a couple of reasons. Policymakers retained the fiscal year 2022 GDP forecast at 9.5 percent despite the surge in Covid cases earlier this year. Meanwhile, the central bank lifted the inflation estimate to 5.7% from 5.1% at June’s policy announcement.

This means that despite rising near-term price pressures, it seems that the central bank is brushing aside this as transitory. That is in line with most central banks across the world. Moreover, the 5.7% inflation rate is still below the central bank’s target range of 2 – 6%. With that in mind, a lack of urgency to unwind lose policy as inflation runs temporarily hot is likely denting the Rupee for the time being.

In a separate market-moving event, the Supreme Court of India ruled in favor of Amazon to stop the sale of Future Retail Ltd. to Reliance Industries Ltd. That has opened the door for the e-commerce giant to gain further access into one of Asia’s largest economies. As this crossed the wires, the Nifty 50 turned lower, erasing initial gains on the RBI rate decision.

Over the reaming 24 hours, USD/INR will be eyeing the US non-farm payrolls report for volatility risk. Economists have been tending to overestimate the health and vigor of the economy, opening the door to disappointing data results ahead. A material miss to job gains may keep the Fed dovish for longer, but policymakers could still be on their guard if wage data remains elevated amid rising inflationary pressures.

RBI Rate Decision, Governor Shaktikanta Das Highlights (Via Bloomberg)

  • The economy is recovering from the second wave setback
  • Moderating of oil prices may alleviate inflationary pressures
  • Demand is improving, but underlying conditions weak
  • Inflation risks are broadly balanced
  • Markets have welcomed the variable reverse repo
  • The RBI will ensure an orderly completion of government borrowing
  • The central bank has announced over 100 measures since the pandemic

Indian Rupee Technical Analysis

USD/INR is facing its next key technical test after prices extended losses through near term-rising support from June. The pair is eyeing the 74.1030 – 74.0130 inflection zone, which may act as support and send prices higher. That may place the focus on the 23.6% Fibonacci retracement at 74.3933. Otherwise, clearing the zone may open the door to extending July’s top.

USD/INR Daily Chart

Indian Rupee Falls as RBI Holds Dovish Stance, USD/INR Eyes Support. Nifty 50 at Risk?

Chart Created in TradingView

Nifty 50 Technical Analysis

The Nifty 50 remains in a dominant uptrend since last year’s bottom. Guiding the index to the upside is a rising channel of support from 2020. Prices have left behind a Doji candlestick pattern, which is a sign of indecision. When this appears within an uptrend or downtrend, it could be an early sign of a turning point. A downside close from here risks opening the door to a near-term pullback.

Nifty Daily Chart

Indian Rupee Falls as RBI Holds Dovish Stance, USD/INR Eyes Support. Nifty 50 at Risk?

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

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.

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