Uncertainty Ahead of RBI Rate Decision as Rupee Approaches Significant Technical Level

Of fifteen economists surveyed by Mint, eleven expect India’s central bank, the Reserve Bank of India, to cut interest rates by 25 basis points at today’s meeting. Of a further fifty-six economists polled by Reuters, forty expect the same. With no unanimous prediction, this makes rupee volatility highly likely before and after the meeting.

The announcement of India’s interest rate, which stands currently at 6.25%, is due today (Wednesday, August 2nd) at 2:30pm in Mumbai, or 9am GMT.

India’s central bank is facing pressure to cut the interest rate after June data showed inflation falling to a five-year low of 1.54%, well below the bank’s target of 4%.

Inflation in India has run from hot to cold in recent years, with levels above 12% in late 2013.

What makes today’s decision particularly interesting from a USD/INR perspective is not only the uncertainty over the interest rate itself, but also the level from which the rupee will move, either way.

Weakness in the US dollar since early July has pushed USD/INR down to the major support level (equivalent to rupee resistance) of 64.0 – a level from which the exchange rate bounced in April, May, June and again yesterday, when a fall in USD/INR to 64.01 prompted a rally to 64.13.

Ahead of the European session, with USD/INR back threatening 64.0 (at 64.05 as of 6:45am GMT), the exchange rate is set for a strong move either way.

Should the RBI go against the general consensus and keep rates on hold, as they did in February, strength in the rupee will likely be compounded by the triggering of stop-loss orders resting below 64.0, which inevitably will succumb. On the flip side, should the RBI cut, investors will see this as a great opportunity to sell rupees while they are high, and the rally away (above) 64.0 will be stronger than it otherwise would be.

The rupee remains up nearly 6% this year against the US dollar but has struggled in recent months against most of the other majors and remains close to multi-month lows against several of them, most notably the euro.

As an emerging market currency, the rupee is inherently vulnerable to the recent and ongoing trend of hawkishness among the world’s major central banks, which works to lessen the attractiveness of emerging market currencies. Simply, as interest rates rise or are expected to rise in advanced economies such as the US, Canada, Australia and Europe, riskier currencies like the rupee will become less attractive to investors.

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Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.