USD/INR bounces back towards 71.25 despite RBI rate cut pause bets

According to the latest Reuters poll of economists, the Reserve Bank of India (RBI) is likely to refrain from cutting rates again until late this year amid rising price pressures and expectations of a fiscal stimulus to be announced by the Indian government next month, in an effort to boost growth.

Key Findings:

“The latest poll projected the central bank to extend that pause - keeping its repo rate on hold at 5.15% at its February meeting and until at least October.

In response to additional questions, all 42 economists said growth would gradually pick up in the next six months and a majority said inflation would moderate.

The RBI was forecast to next cut rates by 25 basis points to 4.90% in the October-December quarter.

Gross domestic product growth was forecast to average 5.0% this fiscal year, the lowest since polling began for the period in April 2018.

The government was forecast to set a fiscal deficit target of 3.6% of GDP for 2020/21, up from 3.3% targeted for the current year.

While fiscal expansion is generally followed by a spike in price pressures, a majority - over 60% of 39 respondents - said it would not prove to be inflationary.”

FX Implications:

Despite diminishing odds of an RBI rate cut next month, the Indian rupee fails to benefit and trades weaker near 71.20 vs. the US dollar, at the time of writing.

The USD/INR cross hit a fresh eight-day high of 71.26 on Wednesday after the Asian currency was pressured by rising China virus concerns led losses in the Indian stocks.

Meanwhile, India’s stagflation risks and nervousness ahead of the fiscal budget kept the rupee undermined.  However, the losses in the rupee were capped by the weakness in oil prices.

USD/INR Technical levels to consider: