Emerging Market FX: USDINR Fundamental & Technical Set Up

USDINR Indian Rupee

The Indian Rupee is the currency of the Republic of India and is issued by the Reserve Bank of India.

As of 2011 market exchange data it was estimated that the Indian economy was worth 1.8trillion USD, placing it firmly in the top ten largest global economies. When calculated by purchasing power parity, estimations place India within the top five largest economies with a PPP estimated at 4.06 trillion USD. India is one of the most rapidly developing economies within the Emerging FX space, although it remains hampered by a low GDP per capita as the workforce remains predominantly agriculture based, but this sector contributes only 17% to GDP.

The boom in the services sector is driven by the surging demand for off shore services, particularly in the high technology and software sectors. IT services been the major source of economic development over the last decade, the services sector now accounts for more than fifty percent of the domestic output but only utilises thirty percent of the workforce. India continues to suffer inevitable growing pains but since removing the protectionist policies in 1991, the country has benefited greatly from foreign trade and direct investment.

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Fundamental Take Away

As with most Emerging market FX pairs of late the dominant USD has weighed upon the domestic currency. The Indian Central Bank has sought to combat the ongoing assault from USD strength by lowering its policy repo rate and reverse repo rate by 50bps.

The challenge for the Indian Central Bank was that up until its September meeting it remained hemmed in by Inflation data but this hurdle was removed when August data came in below expectations which gave the Central Bank the cover they required to make a move.

Post the rate move the INR fell from around 66.32 to currently rest below 66.00 levels as of writing. The decline represents an acceptance by the market of the near term conviction of the Central Bank to focus on private investment as a tool to boost growth.

Another interesting move of note was that the RBI announced that Foreign institutional holdings of government debt would be denominated in Rupees instead of USD. This move effectively raises the debt ceiling for foreign ownership. The combination of the rate cut and tweak to domestic debt structure increased near-term demand for government debt.

By moving on both the repo and reverse repo rate at the September meeting, they will likely be on hold now while they monitor the impact on the real economy. Another driver for the RBI to remain on hold is the continued concern regarding the potential impact of a move by the US Federal Reserve. The RBI will unwillingly to act in advance of the FED’s next meeting as they wish to seek to dampen volatility around an anticipated FED action.

Technical Takeway

From an FX trade perspective the fundamental picture supports the view that the INR remains firmly entrenched in an uptrend. It is also noteworthy from a trading perspective that the Rupee remained one of the most stable EM FX pairs during the late August volatility, this is indicative of the growing depth of liquidity in the market.

Pullbacks in the USDINR are still viewed as buying opportunities especially against the major trend line support which on a weekly scale tracks back to 2011 lows.

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Trading Take Away

  • Monitoring the current corrective price action, playing the pullback as an opportunity to align with the dominant uptrend
  • As price potentially tests the equality corrective objective, previous horizontal resistance and ascending trend line confluent support zone at the 64-65 area, will watch for a daily reversal pattern to enter long positions leaning against the 63 lower support level. Targeting a test of the upside of the weekly/daily projected trend channel towards the previous highs at 68.80

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