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RBI finalized the make-up of its new six-member monetary policy committee (MPC). They are three government nominees who are distinguished economists and three RBI members.
In a split decision, the governor has the deciding vote. This is part of the overhaul of RBI’s monetary policy setting, including setting an inflation target of 2-6% in the medium term.
The vote-based system puts RBI on par with its peers, allows for diversified views, and reduces pressure on the governor.
Meanwhile, the expectations of Reserve Bank to cut rates by 25 basis points during Christmas makes the central bank's inflation target 4 percent more difficult on a sustainable basis, which in turn causes the INR depreciation.
In addition to that, for USDINR, the immediate cause of concern prevails on the possible outflows from the near USD25bn FCNR-B (foreign currency non-resident) deposits raised in 2013 that would mature in September-November. However, net outflows should be manageable particularly given continued low yields worldwide.
INR trading radar:
Short SGDINR: This position is up by 2.7% including positive carry, as the SGD fell along with G10 currencies and SGD weakened vs. NEER. While the INR might face some headwinds on foreign currency deposit outflows, it will likely outperform SGD on total return basis due to its positive carry.
Long INRKRW 3m NDF: The trade is down by 1.3% including positive carry, mainly on KRW rally. INRKRW is trading close to 3-year lows. The RBI credibility is intact with the new governor and the intervention strategy will likely continue. The INR foreign flows have improved recently and the risk sentiment should support the performance. The trade has a positive carry of 44bp/month.
USDINR 3mx12m NDF flattener: We entered into USDINR 3mx12m flattener this week. The forward points should fall as the demand for the USD will likely increase in the onshore markets from the counterparties to RBI's long positions. The RBI will be cautious in providing USD liquidity to the markets, given FCNR payments in coming months.
