FxWirePro: Stay short in USD/INR futures as Indian rupee strength to intensify amid both fiscal and monetary policies

The Reserve Bank of India (RBI), in the end, has delivered a 25bps policy rate cut. But more evidently the market doesn’t seem to be satisfied yet, especially as RBI reiterated a “neutral” stance. While INR continues to strengthening by against USD (0.6% yesterday), indicating that the market favors INR-denominated assets, especially bonds. Obviously, the bond yields will drop if RBI were to cut rate further.

The key question is the inflation outlook. From the data itself, our conclusion is that there is a significant downside risk for RBI’s inflation forecast (3.5-4.5% for the second half of year).

A good monsoon this year, the slow implementation of GST reform, plus the downside risks facing the growth, suggest that the RBI may have to recalibrate its forecasting model.

On GST reforms: The RBI intervened to temper the INR's appreciation against the US dollar, in what could be a sign of things to come with gushing liquidity coupled with rising optimism about policy reforms in the country after the Rajya Sabha approval for bringing in the Goods & Services Act. 

We foresee the USD to meet supply pressure at higher levels. 

Well, in the currency derivatives market, the most traded USDINR futures contract for August delivery on the NSE is currently trading at 63.73. The August contract open interest increased 7.07 % from the previous day September contract open interest increased 7.86 % in the previous session We expect the US $ to meet supply pressure at higher levels. Capitalizing on rallies, it is wise snapping the rallies to go short on the US$INR pair for more southward targets.