Rupee set to touch 83-per US dollar mark if RBI remains on hold this week

By David Finnerty and Subhadip Sircar

The Reserve Bank of India may face growing pressure to defend a key level for the rupee as its interest-rate pause looks set to weigh on the currency.
 

The rupee is poised to test the 83-per dollar mark in the near term if the central bank remains on hold this week and changes its stance to neutral, effectively signaling an end to its hiking cycle. Some analysts say the RBI has more than enough in its warchest to defend the rupee, after its foreign-reserve stockpile swelled to almost $600 billion in May.

“The RBI will likely protect the 83 level insofar as the broad dollar index doesn’t durably surge much higher than its current 104-105 level,” said Dhiraj Nim, India economist and forex strategist at Australia & New Zealand Banking Group Ltd. “The RBI has recouped its FX reserves well and may not be hesitant to sell some dollars.”

Thursday’s policy review will help shape the rupee’s fortunes, with traders expecting little reprieve after the currency fell under the weight of a stronger greenback in May. Technicals are also flashing a warning sign, as a gradual ascending triangle formation points to a further rise in the dollar-rupee pair.

The rupee declined 1.1% in May, its biggest monthly drop this year, as the dollar climbed and the RBI ramped up purchases of the greenback. It ended at 82.3 on Friday.

Traders are looking to the upcoming policy review for clues on the rate outlook after RBI Governor Shaktikanta Das said the hold decision in April was a “pause, not a pivot.” All eight economists in a Bloomberg survey expect the central bank to stand pat on Thursday.

From a technical perspective, the currency pair’s 200-day moving average may cap its downside in the near term.

But with the dollar showing recent signs of weakness, a further drop in the rupee may be limited. Late Friday, US May payrolls surged along with joblessness, giving Federal Reserve officials more reason to pause interest-rate hikes. 

“We suspect it will be difficult to sustain a break through 83.0 for USD/INR in the weeks ahead,” says Mitul Kotecha, head of emerging markets strategy at TD Securities in Singapore. “Strengthening portfolio inflows and limited sensitivity to broad dollar moves alongside a relatively attractive yield will likely offer the rupee some support.”

Here are the key Asian economic data due this week:

• Monday, June 5: Australia 1Q inventories and company operating profit, China Caixin services PMI, Indonesia CPI, Singapore retail sales
• Tuesday, June 6: RBA rate decision, Australia 1Q BoP current account balance and net exports of GDP, Japan labor cash earnings and household spending, Taiwan CPI, Philippine CPI, Thailand CPI
• Wednesday, June 7: Australia 1Q GDP, RBA’s Lowe and Bullock speak, China trade balance, Taiwan trade balance
• Thursday, June 8: RBI rate decision, Australia trade balance, New Zealand 1Q manufacturing activity volume, Japan BoP current account, trade balance and 1Q GDP
• Friday, June 9:, China CPI and PPI, South Korea BoP current account balance, Philippine trade balance, Malaysia industrial production