The Indian rupee weakened against the US dollar after the Reserve Bank of India (RBI) announced its monetary policy decision. USDINR traded to 71.50 at the wake of the announcement before settling at 71.42.
The RBI took market participants by surprise today when they stood at the sidelines and kept interest rates steady. It was widely expected that the central bank would cut rates for the sixth time from 5.15%. Speculations that further monetary policy easing would be needed given the signs of a slowdown in the Indian economy.
Slowing Growth and Other Problems
Last week, the country’s GDP report for the third quarter of the year printed at 4.5%. This is the slowest economic growth we have seen since 2013. It also marked the sixth consecutive month of economic slowdown.
The country is also seeing a slowdown in investments. Financial institutions have been working to fix their balance sheet problems. India has been faced with a shadow banking crisis as banks and corporations are riled with bad debt.
Soaring Food Prices Kept the RBI from Cutting Rates
However, the central bank decided to stand pat because the economy still seems on track to achieve is medium-term inflation target at 4%. Indian policymakers did not want to cut rates any more as food prices have sharply risen over the past few months. In fact, food prices have soared 45% in September and 20% in October.
On top of that, there seems to be skepticism over the effectiveness of the central bank’s prior rate cuts. Banks have been reportedly hesitant to pass on lower rates to consumers which has been frustrating to policymakers.
The RBI also revised down its growth forecast for the fiscal year ending in March 2020. It was previously anticipated that GDP would be around 6.1%. But taking into consideration the recent changes to the economy, it is now eyed at 5%.
While the central bank kept rates steady, they did warn that they would cut rates even further if their assessment of the economy warranted more easing.
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USDINR Outlook
The Indian rupee weakened at the wake of the central bank statement, however, it would seem that USDINR found resistance at a previous support level around 71.45. If there are enough buyers in the market, a strong bullish close above this price could mean that the currency pair may soon be on its way to test resistance around 71.70.
On the other hand, if sellers dominate the market, USDINR may drop to its November lows around 71.10.Download our latest quarterly market outlook for our longer-term trade ideas.
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