FxWirePro: Indian rupee rallies on verge of dragging 2m highs – USD/INR long hedge as RBI’s cuts on cards coupled with risks of union polls

In this write-up, we’ve emphasized a cautious bias on INR FX in light of the weaker fiscal position. The RBI rate cut and dovish tone of the statement adds to this degree of cautiousness. Not surprisingly, Indian rupee (INR) tends to struggle during periods when the RBI is cutting interest rates. 

The INR has been on bullish streaks this past week spurred by strong net foreign inflows and reduced political tensions. USDINR slipped further yesterday to the psychological 70.00 levels to mark 2-months lows and extension of these bullish rallies are foreseen in the near terms. Also cushioned by the lingering optimism over a trade deal between the US and China. Unwise to disregard the major uptrend of USDINR and needless to say that the suspicion is hovering as to how much more can INR rally? The rally has indeed surprised most and we would agree there is scope for consolidation near term. 

The strong momentum could see USDINR test this year’s low of around the 69.20 level but it would be difficult to argue for a continued strong trend below that given slowing growth and a central bank that is keen to ease policy further. 

Over the past month, INR has been the star performer against the USD in Asia but the other winner is PM Narendra Modi. Heading into 2019 and on the back of defeats in key state elections late last year, he was facing a tricky federal election. Three months later and just one month before the elections, the stars are lining up for PM Modi. His position has strengthened, the anti-incumbency voice is pushed to the background a bit, the rupee has strengthened and stabilized, inflation is lower, and a government-friendly central bank is set to cut rates again in April.

Overall, here are some key bullish and bearish scenarios of this emerging currency cross:

Bearish INR risk scenarios: 1) Uncertainty around election outcome curbs capital inflows; fiscal slippage weighs on investor appetite.

Bullish INR risk scenarios: 1) Domestic demand accelerates on terms of trade boost and easier financial conditions

Trade tips (USDINR): As we could foresee huge FX turbulence of this pair in the weeks to come, on hedging grounds, we advocate initiating longs in USDINR futures contracts of mid-month tenors with a view to arresting further upside risks. Courtesy: Commerzbank & JPM

Currency Strength Index: FxWirePro's hourly USD spot index was at 20 (mildly bullish), while articulating at (13:34 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex