USD/INR loses traction following RBI surprise hold

• USD/INR runs into supply following INR surprise hold.
• RBI keeps repo rate unchanged at 5.15%, reverse repo at 4.9%.
• RBI says inflation remains within target and to remain accommodative.
• US/Chinese trade tensions remain as a key role in the global markets.

USD/INR is bleeding from a high of 71.6550 to a low of 71.2050 on the day so far, -0.34% at the time of writing. The main focus had been on the Reserve Bank of India keeping its key lending rate on hold in a surprise decision on Thursday.

Markets were positioning for a sixth-consecutive rate cut from the most aggressive major central bank in the world, considering a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5% for the year through March. However, while the RBI reiterated it would maintain an accommodative stance, the monetary policy committee unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.

With economic growth standing at its lowest in more than six years, down to 4.5% in the September quarter from 7% a year ago and despite a recent series of fiscal stimulus from Prime Minister Narendra Modi's government, which was re-elected in a landslide in May, the committee said in a statement, "the MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture."

Government action has fallen short to boost domestic demand and has caused India’s credit outlook to be downgraded to negative by Moody’s last month. 

The government in turn is pointing to weak global demand and high uncertainty as the main source of weakness. Several fiscal measures have been taken, among which a corporate tax cut and support to the real estate sector, but to really underpin consumption demand would require a fiscal boost which would break the government’s target for the fiscal deficit of 3.3%,

analysts at Nordea explained.

Attention is firmly on US and Chinese trade talks

The latest news came today in statements from top US officials, including US President Donald Trump who said, that the US is having meetings and discussions with China. Trump describes meetings as ‘going well’ and said that "something could happen regarding 15th Dec tariffs, but we are ‘not discussing that yet’.

US Treasury Secretary, Mnuchin, speaking to reporters after a House Financial Services Committee hearing, also commented on the matter, stating that US and Chinese deputy negotiators had held a call on Thursday night and were “actively working” towards a trade deal. US-China trade talks are “on track” but not bound to a specific deadline."We’re working as hard as we can. But the President said, we’re going to get the right deal and we’re not going to be confused about an arbitrary deadline. But the talks are progressing.” Asked if talks were on track he said: “they are”. 

Meanwhile, in more recent trade, a Wall Street Journal article is doing the rounds which stated that China and the US remain at odds over the value of farm goods Beijing will buy. However, the good news is that there is an official statement from Beijing which confirms that China’s trade negotiations with the US remain on track.

China’s Commerce Ministry said Thursday that the negotiating teams from both sides have maintained close communication, though it didn’t provide details on progress. The recent strain had spooked investors and stoked concerns over the global economic outlook,

the article leads. 

USD/INR levels

• USD/INR Technical Analysis: Drops to 1-week lows, eyeing 61.8% Fibo. support