Monetary Policy: This is what forex investors eye from RBI; rupee strengthens against dollar

The Indian rupee on Thursday, strengthened against US dollar benchmark index at interbank forex market. As per data recorded by Investing.com, rupee was trading at 68.640 up by 0.237 points or 0.33% against US dollar at around 0917 hours. In previous trading session, rupee finished at around 68.865 against dollar. Even though markets took hit from Skymet’s below normal monsoon forecast, but that impact in rupee was not witnessed on Wednesday. This is because forex investors are keenly eyeing the Reserve Bank of India (RBI) governor Shaktikanta Das and his policy decision in the first bi-monthly monetary policy of FY20 which will be announced today. Majority expect another 25 basis points cut in repo rate. This is believed to be a good news for forex investors, also since the new swap ratio taken place from RBI and banks.

Banking system remains flush with Dollar liquidity. Banks have to participate in another USD 5 billion swap on 23rd April. As a result, banks who are holding the dollar liquidity have swapped from shorter tenor into month end.

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For example as per Kotak Securities,  if a bank had sold spot USD and bought a spot next or a week end forward would now look to rollover the long from the spot next or week end to dates after April 23rd. As a result, the spread between spot and 1 month edged higher at 50 paise. Wider forwards would encourage exporters to sell more in a weak Dollar market and discourage importers from covering their payments. Speculators, looking to play the carry trade would be eager to capture the elevated forward premia (1 month forward yield is now around 8.73% over cash). All these creates more supply of Dollars into the market and less demand. As a result, USDINR spot would remain under pressure.

However, Anindya Banerjee analysts at Kotak Securities also believe the swap shock at INR can be cooled off with repo rate cut in April policy.

Banerjee says, “RBI has prepared the ground for a series of rate cuts and higher Rupee liquidity. This is good news for bonds. Indian 10 year govt bonds end on a positive note with the yield on the 10y bond closing 8 bps lower at 7.273%. Rising equity, rising bond prices, coupled with risk on mood in the global market, augurs well for the INR.”

Well what will be RBI’s stance on policy repo rate, hence, will be keenly watched.