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RBI Holds Interest Rates at 5.25%, Cuts India Growth Forecast Amid Rising Global Risks 
The Reserve Bank of India unexpectedly left its benchmark repo rate unchanged at a six-year low of 6.25 pct during the meeting held on December 7th despite wide expectations of a rate cut, following a severe cash crisis. We also expect another rate cut in Q4 2017.
RBI had announced an increase in MSS (market stabilization scheme) limit to INR6tn and the liquidity should be better managed with additional bank deposits over coming days, and the long end of the curve should realign with USTs and higher oil. INR NDOIS 1s5s should steepen if the RBI chooses to cut repo rate by the minimum of 25bp, and we tighten stop-loss to 12bp from earlier 6bp, and revise trade target to 37bp.
Indian Rupee is now projected to appreciate as markets likely to discount the RBI policy outcome where the repo rate was kept unchanged. The governor reckons that India’s inflation rate has hazards from volatile global crude price and the unclear effects of the recently announced demonetisation (withdrawal of high denomination currency notes).
Hence, the portfolio outflows’ pressure should ease this month this month after a total $5.3bn outflows in November and the INR NDF curve should move lower with a repo rate cut. We hold to our short USDINR position as well as USDINR 3xm12m flattener.
The shorts in USDINR 1m NDF were initiated on 30th November at 68.72 and it is currently trading at 67.60, at a profit of 1.72% including positive carry. We revise trade idea target to 66.50 (from 67.00 earlier) and stop to 68.15(from 69.50 earlier), locking in a profit of 0.90% including positive carry. USDINR spot level of 67.00-67.20 (equivalent 1m NDF at 67.15-67.35) would work as important support in this down-move.
