RBI 25 bps rate cut shock on rupee likely - here’s where Indian currency is headed against dollar

The moment Reserve Bank of India (RBI) announced another 25 basis points rate cut in April 2019 policy, forex investors turned sellers of Indian rupee. The currency weakened against US dollar benchmark index. According to Investing.com, the rupee was trading at 68.865 up by 0.468 points or 0.66% against the dollar at interbank forex market. The domestic currency opened at 68.66 per dollar ahead of the policy announcement. In previous trading session, rupee finished at 68.41 per dollar. In his second monetary policy announcement as RBI Ggovernor, Shaktikanta Das along with MPC members trimmed policy repo rate to 6% from previous 6.25%. Consequently, the reverse repo rate under the LAF stands adjusted to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25%. RBI governor Shaktikanta Das also maintained neutral monetary policy stance. 

Expecting 25 basis point rate cut in this policy, Anindya Banerjee analyst at Kotak Securities said, “RBI has signalled that it intends to keep liquidity at the neutral zone and would use both the bond and FX markets to augment INR liquidity. However, with INR seeing strength on a REER basis, RBI can use FX route more than bonds, unless the bond curve steepens too far.”

Analysts at ICICI Bank said that, “Foreign portfolio investment has had a volatile innings in India over this fiscal, with stability being fleeting over most months. The recent momentum has been extraordinary, and begets some evaluation into the pattern over FY2019. After a disappointing start to the fiscal (April-June saw a sharp USD 9.1 bn outflow of portfolio investment), July and August saw net inflows into the portfolio account, albeit modest.”

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FPI outflows from debt and equity FYTD stands at $3.9 billion as compared to a peak outflow of $16-17 billion till end-October last year. Factoring in the recent surge in FII inflows, which has surpassed our expectation, and with unconfirmed reports of exports achieving a record high in March 2019, we pare our BoP deficit estimate to $ 4-5 billion in FY2019 (earlier $13 billion).

In ICICI Bank’s view, “The outlook for FY2020 is far more favourable, given a relatively benign outlook for commodity prices, fading headwinds from the liquidity crunch and relatively stable portfolio inflows. The balance of payments should show a surplus of ~USD 15 bn, which could have an upside bias.”

ICICI Bank added, “Improved capital flows and better sentiment in the near term has led to significant bouts of strength in the Rupee. We expect the USD/INR to trade in the range of ~68-70 over the short term. Over the medium term, we retain our view of a mild depreciation bias. Several factors such as global growth uncertainty, volatile capital flows, possibility of widening in current account deficit on the back of an investment revival, commodity prices etc. would have to be monitored.”