- Despite high RBI rate and Nifty, Indian Rupee has been underperforming
- Local CPI may ease in 2021 as USD/INR recovers on some lost ground
- Short-term risks to watch for: new Covid strain, Indian PMI & inflation
Despite what has been a crushing year for the US Dollar, it is looking to wrap up 2021 with a win against the Indian Rupee. In fact, INR is down about 3% against USD year-to-date (YTD) even though the Nifty 50, India’s benchmark stock market index, set record highs. This is also despite the Reserve Bank of India (RBI) ending up with some of the highest main lending rates post-Covid within the Asia-Pacific region.
In comparison, neighboring ASEAN currencies turned net positive against USD. Might this trend reverse course and what are some risks to watch for in the near-term? Heading into 2020, India was already in a vulnerable economic position before Covid, with inflation running high thanks to soaring onion and garlic prices. This was mixed with a wobbly banking sector as growth slowed, raising the risk of stagflation.
When Covid struck, the RBI eased policy in an emergency meeting as it also embarked upon unconventional measures. However, it did not get very far with the former as inflation remained persistently above target. A higher domestic fuel tax also did not help. Yet, global appetite for higher returns, especially in emerging markets, still resulted in strong capital inflows into equities.
To soak up this demand, and more importantly keep the Rupee under pressure, the RBI gathered foreign exchange reserves at a hungry pace. As a result, India became the 5th-largest FX reserve holder this year. Relatively high inflation, and plunging short-term interest rates, sent capital flowing out of local government debt at record levels – see chart below.
Downward Pressures on the Indian Rupee
Going forward, Indian inflation is expected to ease towards the midpoint of the RBI’s target range (2-6%) by the end of 2021 – see next chart below. More importantly, this could open the door for much-needed monetary policy easing on top of fiscal support already worth about 15% of GDP. The government has made it clear it is not concerned with rising debt levels for the time being.
This may make local debt returns look more favorable as economic conditions stabilize and the world moves forward with vaccination. In turn, this could open the door for the Indian Rupee to play ‘catch-up’ to its neighboring FX peers. In the long run, it will also leave the RBI with ample reserves to help alleviate steep depreciation in its currency when global rates eventually rise and pressure emerging market debt repayments.
In the immediate term, there are some risks. Chiefly, a new more-contagious strain of the coronavirus is being analyzed to determine how effective developed vaccines are against it. All eyes are also on the two Senate runoffs in the United States on January 5th for the composition of the upper chamber. This will determine how effective Joe Biden’s administration will be at passing meaningful fiscal policy.
Focusing on local risks, the next Markit Indian Manufacturing PMI print for December is due on January 4th. This will offer an idea of not just Indian output expectations, but for global growth as well. Then, CPI for the same period is up on January 12th. The latter will be closely scrutinized for odds of an RBI rate cut in the near-term. For more information, check out the DailyFX Economic Calendar.
Indian Rupee Technical Analysis
The USD/INR technical outlook remains tilted to the downside, part of the broader downtrend since April. Falling resistance from then is keeping the focus towards the bearish side, with a push above it opening the door to a reversal. Recently, the short-term 20-day Simple Moving Average (SMA) crossed under the medium-term 50-day one, forming a bearish ‘Death Cross’. Further losses places the focus on the 72.76 – 73.00 support zone.
USD/INR Daily Chart
USD/INR Chart Created in TradingView
Nifty 50 Technical Analysis
The Nifty 50 is showing a sign that upside momentum is fading. Despite prices having touched new highs, RSI has not, creating negative divergence. A turn lower may place the focus on the 20-day SMA, where a close under it exposes the December 21st low at 13131. Beyond that, the 50-day SMA may keep the focus tilted to the upside. A push above the 38.2% Fibonacci extension at 13986 exposes the midpoint at 14250 on the daily chart below.
Nifty 50 Daily Chart
Nifty 50 Chart Created in TradingView