Indian Rupee At Risk As RBI Lowers GDP Estimates, Boosts Bond Buys. USD/INR Eyes NFPs

The Indian Rupee finds itself under pressure against the US Dollar after the Reserve Bank of India (RBI) maintained its benchmark repurchase rate unchanged at 4.00% in June. This was widely expected. A surprise came in the fiscal year 2022 downgrade to growth estimates. GDP is seen coming in at 9.5%, down from 10.5% previously. The central bank also announced a higher amount of bond purchases for the second quarter, worth about INR1.2 trillion, likely amplifying weakness in the Rupee.

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RBI Rate Decision, Governer Shaktikanta Das Highlights (Via Bloomberg)

  • ‘Tough times need tough decisions’ - Das
  • Spread of Covid in rural areas poses downside risks
  • Core price pressure may be elevated
  • Need enhanced, targeted policy support for exports
  • FX reserves indications show the nation crossed $600 billion
  • Liquidity window of 150b Rupees opened until March 31, 2022

At the last RBI rate decision in April, the central bank unveiled a 1 trillion Rupee government bond purchasing plan, appearing decidedly dovish, pushing USD/INR towards levels last seen in June 2020. A reaffirmation of the 2 – 6% inflation target for fiscal year 2022 – 2026 might have also left a few investors disappointed that there was not a more aggressive approach.

Broader gains in the Indian Rupee and Nifty 50 since the middle of April have occurred despite the surge in local coronavirus cases. This may have been in part due to Prime Minister Narendra Moody’s hesitation to consider nationwide lockdowns. The markets may be looking forward to a recovery from the wave. The exponential growth in cases has notably slowed as of late – see chart below.

Heading into the remaining 24 hours of the week, USD/INR will likely be closely eyeing the US non-farm payrolls report. Thursday’s stellar ADP employment report offered a preview of how markets could react to a better-than-expected jobs report. Specifically, better wage growth could further fuel a push higher in Treasury yields as Fed tapering expectations are brought forward. That may propel USD/INR higher in the near term.

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