- USD/INR keeps pullback from weekly high on RBI’s action.
- RBI crossed the market forecast to increase Repo rate to 5.4%.
- US dollar tracks yields to consolidate the biggest daily loss in a week by snapping two-day downtrend.
- US NFP, China headlines and recession talks are the key for fresh impulse.
USD/INR takes offers to refresh intraday low around 78.95 on the Reserve Bank of India’s (RBI) Monetary Policy Meeting announcements during early Friday morning in Europe.
The Indian rupee (INR) pair dropped after the RBI unveiled 50 basis points (bps) of an increase in the benchmark Repo Rate to 5.40% after the latest monetary policy meeting.
Following the announcement, RBI Governor Shaktikanta Das mentioned that the domestic economy faces headwinds from global forces. The RBI Boss also announced a downward revision to the Indian Gross Domestic Product (GDP) figures while saying, “Inflation trajectory continues to be heavily contingent about geopolitical developments.”
Ahead of the RBI verdict, the Indian rupee’s volatility, measured in terms of the daily close-to-close, reached its highest level since late March per Reuters. The news also stated that The RBI is widely expected to raise the repo rate as it continues its battle to control inflation. Economists, however, differ on the size of the rate hike that the RBI will deliver as the central bank aims to strike the right balance between inflation and growth.
Reuters quotes Anindya Banerjee, vice president at Kotak Securities while saying, “Historically, whenever the implied volatility in options has been priced higher ahead of the policy, there tends to be lower-than-expected volatility in the pair (USD/INR)."
“India's record trade deficit in July has raised considerable concerns over its external balances and might force the Reserve Bank of India to rethink its strategy of persistent intervention to slow the rupee's depreciation,” mentioned Reuters.
In addition to the RBI moves, the market’s fears of recession and cautious mood ahead of the key US employment data from the US and Canada also appear to keep the USD/INR bulls hopeful. That said, the Reserve Bank of Australia’s (RBA) quarterly Monetary Policy Statement backed the market’s recession fears the Bank of England (BOE) conveyed the UK recession in late 2022. On the same line were comments from Cleveland Fed President Loretta Mester who mentioned recession risks have increased in the US.
It should be noted that the US 10-year Treasury yields stabilize around 2.069% after declining in the last two days. Even so, the US Treasury yields continued to portray the risk of recession as the difference between the 10-year and 2-year bond coupons remain the widest since 2000.
Additionally, news that China’s missiles landed on Japan’s exclusive economic zones raised market fears. The dragon nation conducted heavy military drills near the Taiwan border after US House Speaker Nancy Pelosi visited Taipei against Beijing’s warning.
While portraying the mood, Wall Street closed mixed and the S&P 500 Futures print mild gains while taking rounds to the two-month high flashed the previous day, up 0.23% intraday around 4,162 by the press time.
Having witnessed the initial reaction to the RBI moves, USD/INR traders should wait for the US Nonfarm Payrolls (NFP) for July, expected 250K versus 372K prior, for clear directions.
Technical analysis
Unless providing a daily closing beyond 79.65, USD/INR buyers should remain cautious. However, the pullback moves may remain elusive unless refreshing the monthly low near 78.45.