RBI Rate Hike Bets Creeping With CPI Estimates


Indian Rupee, USD/INR, Nifty 50, Inflation and RBI Rate Hike Bets? – Talking Points

  • Indian Rupee and Nifty 50 having splendid performance this year so far
  • But, inflation expectations are increasing, and so are RBI rate hike bets
  • USD/INR eyeing 2019 inflection zone as Nifty 50 turns to face new highs?

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Indian assets have been gaining notable attention within the Emerging Markets space as of late. The Indian Rupee has been consistently strengthening against the US Dollar this year, outperforming neighboring ASEAN peers like the Singapore Dollar. The Nifty 50, India’s benchmark stock market index, is up 7.15% year-to-date, compared to the S&P 500’s 4.15% at the time of writing.

What has been driving these trends and might they continue ahead? For USD/INR, the pair has been very closely following what is going on in Reserve Bank of India rate expectations. In the chart below, Rupee gains have been following a notable hawkish shift in where traders think the RBI will take its benchmark repo rate in the long run. Local forward curves (3-year) have it at about 6.4%, compared to today’s 4.0%.

Most of the hawkish shift occurred over the past month, particularly after India’s government announced a surprisingly massive budget worth 9.5% of fiscal 2021 GDP. Rising growth expectations are certainly attracting investors from across the world. Local net foreign equity investment (12-month rolling sum) recently touched (USD)26165.6 million, the most since 2013 – according to data from Bloomberg.

Might INR traders be getting ahead of themselves? RBI Governor Shaktikanta Das reiterated the central bank’s commitment to keeping liquidity ample in the banking system. Moreover, he doesn’t expect a spike in inflation, with prices to remain within a 6% threshold. Supportive fiscal and monetary policy may continue benefiting the Nifty 50. But, softer-than-expected CPI prints might result in a repricing, particularly for INR.

Immediately ahead, all eyes are on fourth-quarter Indian GDP data due Friday. Growth is expected to rise just 0.5% y/y, but that is compared to a -7.5% outcome in the third quarter. Better-than-expected results may continue supporting the INR and Nifty 50. Check out the DailyFX Economic Calendar for updates on these outcomes when they cross the wires.

Indian Rupee Versus RBI Rate Hike Bets

Indian Rupee, Nifty 50 Outlook: RBI Rate Hike Bets Creeping With CPI Estimates

Indian Rupee Technical Analysis

USD/INR extended losses after taking out the 72.7625 – 73.0020 support zone, now facing the former 72.1400 – 72.4025 resistance zone from 2019. A drop through it could open the door to eventually reaching the 70.3500 – 70.5490 support zone on the daily chart below. In the event of a bounce, keep a close eye on a falling zone of resistance from September which may reinstate the focus to the downside.

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Recommended by Daniel Dubrovsky

How can you overcome common pitfalls in FX trading?

USD/INR Daily Chart

Indian Rupee, Nifty 50 Outlook: RBI Rate Hike Bets Creeping With CPI Estimates

USD/INR Chart Created in TradingView

Nifty 50 Technical Analysis

The Nifty 50 appears to have found support around the 14753 inflection point, the high established in January. This has left prices once again targeting the 100% Fibonacci extension level at 15368. The turn lower earlier this month occurred as negative RSI divergence unfolded, a sign of fading upside momentum. Pushing above 15368 would expose the 123.6% level at 15896. Otherwise, further losses place the focus on the 50-day Simple Moving Average.

Nifty 50 Daily Chart

Indian Rupee, Nifty 50 Outlook: RBI Rate Hike Bets Creeping With CPI Estimates

Nifty 50 Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter





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