Tough call on USDINR range-bound zone on RBI’s policy

Inflation easing and may have bottomed out: The new series of CPI data evidences that inflation may have bottomed out and may not continue to slow. And we do not wait for the RBI's target of 6% YoY by January 2016 to be met. The geopolitical concerns have led to a spike in crude prices that, along with the weakening currency, caused a 10% increase in the retail prices of petrol and diesel in May.

Weak pass-through of policy rate cut to lending rates remains a concern: The RBI may prefer to wait for one more data print to ensure that inflation maintains the desired trajectory before implementing a rate cut. However, the possibility of a cut at the forthcoming meeting has risen given recent statements in support of one by the Finance Minister and the Chief Economic Advisor. We feel that RBI may consider cutting the CRR by 50bp in an effort to prompt banks to pass on rate cuts.

Upticks to 64 per dollar should experience exporter selling. We project the pair to remain in a range ahead of tomorrow's RBI monetary policy decision, hence the range should be in between 63.75-64.15 per dollar.

Currency Derivatives Basket: The synthetic long futures (split strikes) (USDINR)

The synthetic long futures (split strikes) position is created by buying slightly OTM calls and selling an equal number of slightly OTM Puts of the same underlying futures and expiration month. Use slightly different strikes while choosing OTM instruments.

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