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The Reserve Bank of India (RBI) upheld its policy rates unchanged at 6.00% yesterday, widely expected by the market. Notably, there has been a remarkable change in RBI’s forecast. The central bank cut the growth forecast for 2017-2018 fiscal year (India’s fiscal year starts from April) to 6.7% from 7.3%, but revised up the inflation forecast for the second half of the FY to 4.2 - 4.6% from 4.0 - 4.5% previously.
In our opinion, the more significant reduction in GDP growth (0.6 pct points), compared with a mild revision on inflation, indicates that there exists an easing bias in the monetary policy stance.
Most of the economists also project a 25bps cut to the policy rates in RBI’s December meeting.
On the flip side, the dollar (DXY) is back to its robustness 2nd successive month of trade-weighted gains, mirroring a four-week gain in Treasury yields amid hopes of a tax-cutting fiscal package and expectations of a December Fed rate hike. It is foreseen that more hawkish Fed backdrop has the potential to boost USD sentiment against EM currencies.
GST reform was cited as the major reason behind the revisions.
The sluggish GST reform has worsened the economic outlook, but will still give a one-off shock (although moderated) on inflation over the foreseeable future. Clearly, before we have a clearer picture of the impact of GST reform, the uncertainties surrounding India’s economy will remain.
On the flip side, the USD fell mildly against major currencies on the back of profit booking owing to lower ADP employment data ahead of US September non-farm payrolls data tomorrow. September ADP employment rolls were at 135,000 rolls against 237,000 previously.
USDINR futures contracts of October month delivery on the NSE ended at 65.22. The near-month OI reduced 2.35% from the previous day, while November OI rose by 1.52% in the previous session.
Hence, contemplating these derivative market developments, it is projected that the USD to bump into supply pressure at higher levels going forward. Accordingly, we reckon that it wise to snap dips to initiate longs on the USDINR using mid-or-far month futures contracts on hedging grounds.
