Reserve Bank of India’s Economic Measures

The Reserve Bank of India kept the Repo Rate steady at 5.5% and raised the GDP forecast to 6.8% following recent GST cuts. The Rupee is currently weakest against the Swiss Franc compared to other major currencies. In the U.S., trade tensions have sparked concerns about the Federal Reserve, especially with a slowing job market and government shutdown. The US Dollar Index is around 97.85, facing market volatility due to political issues. Expectations are growing for more Federal Reserve rate cuts, driven by recent job loss data. Technical analysis shows bullish signs for USD/INR, which is trading above the 20-day EMA at 88.55. If USD/INR breaks past 89.12, it may rise towards 90.00, while support is around 88.57. We expect the Indian Rupee to continue weakening against the US dollar, with the USD/INR pair reaching all-time highs. Ongoing trade tensions, marked by high US tariffs, and major capital outflows from foreign investors are key factors driving this trend. Traders should view this as a strong indication that the upward movement in USD/INR will continue in the upcoming weeks.

Foreign Institutional Investor Concerns

Recent Foreign Institutional Investor (FII) outflows of nearly Rs 1.3 lakh crore are troubling, and this trend appears to be ongoing. This quarterly outflow already exceeds the significant withdrawals seen in the first half of 2022. Data from the National Securities Depository Limited (NSDL) shows no sign of reversal, indicating that foreign funds are still pulling back from India. The Reserve Bank of India’s decision to maintain the repo rate at 5.5% suggests a focus on domestic growth rather than aggressively defending the currency. With the US Federal Reserve likely to cut rates, this decision closes the interest rate gap but may not draw substantial foreign investments. This stance implies that the RBI may allow the Rupee to gradually depreciate further. Given the strong upward trend and helpful indicators like the RSI remaining above 60, buying USD/INR call options seems wise. We should consider contracts with strike prices slightly above the current high of 89.12, aiming for the psychological level of 90.00. This strategy allows us to benefit from the anticipated rise while limiting our risk to the premium paid. While the case for a weaker Rupee is compelling, we need to monitor the impact of the US government shutdown on the dollar. Historically, as seen during the shutdowns in 2013 and 2018, the dollar typically weakens temporarily due to uncertainty and delayed economic data. If this shutdown extends, it might slow the USD/INR’s rise, providing better entry points for new long positions. For businesses facing dollar costs, it’s crucial to use forward contracts or futures to protect against further Rupee depreciation. The currency heatmap also indicates that the Rupee is particularly weak against the Swiss Franc, suggesting that short positions on INR/CHF could be a viable alternative. This provides a way to diversify away from the direct volatility of the US dollar, which is dealing with its own challenges. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now