Rupee hit yet another record low against USD today, with USD/INR reaching a high of 64.45 before heading lower on suspected buying activities by Central Bank RBI. This allowed price to break back into the rising channel, seeking out Channel Bottom from a technical perspective. However, if past intervention by RBI is of any indication, it is unlikely that this round of intervention would be any different. The main reason is due to the failure of RBI to address the 3 fundamental issue – high inflation, growth rate lower than inflation, and widening current account deficit. Foreign funds are leaving Indian shores at a remarkable rate due to this, resulting in weaker and weaker Rupee. What RBI is currently doing now is to stem peripheral outflows, such as limiting FX purchases, limiting Gold imports, and the latest one – banning duty-free import of flat-screen TVs which will start from 26th August. This smells of desperation, and actually prompt foreign investors to unwind their Rupee assets as RBI is seen “losing the plot”.

Ironically, a weaker Rupee may not be that detrimental to India, as exports would receive higher margins and make them much more competitive, ala Japan style. Yes, it is true that continued weakness is not good as a weakening currency will deter foreign investors to invest in India due to FX losses, and increases foreign borrowing costs in order to finance the budget gap. But should India’s economy recovers using a higher trade balance, Rupee will naturally recover. Perception is extremely important, and by RBI’s recent actions, it is clear that they do not want Rupee to be weak, yet unable to stem the tide. This resulted in a greater loss of confidence in India and RBI’s capability to stabilize the ship, and actually cause much more panic and more selling of Rupee as compared to simply acknowledging that Rupee is going down but affirming that the benefits of a weaker Rupee will outweigh that of cons. Even if RBI may not necessarily believe this, with market running heavily on Central Bank guidance in recent months (see BOJ, Fed, BOE and ECB especially), it is unlikely that market will call out RBI’s bluff, and the confidence may actually help Rupee to stabilize without RBI doing anything. Rightly or wrongly, the bark of a Central Bank is much more potent then its bite.

This discussion may be ultimately moot, as RBI has been found out by the market due to its inaptness to drive Rupee lower. Those that did not dare to go against RBI before, will be bolder and dare to go short on Rupee, betting for a collapse of RBI potentially in the same way BOE was broken before. Even if RBI start to play down the impact of weakening Rupee, it is unlikely that the market will believe them as their credibility is in tatters right now. Looking at how things are turning out, unless India receives a lump sum of stimulus either from private financing or foreign assistance, it is unlikely that RBI will be able to pull themselves out of this hole they have dug themselves into.

Hourly Chart

From a technical point of view, it is possible that price will find support along Channel Bottom. Stochastic readings are currently close to the Oversold region, suggesting that a bullish cycle may occur when Channel Bottom is tagged. Even if prices break Channel Bottom, the Kumo underneath will be able to provide additional support.

Daily Chart

It is a little bit difficult to gauge where price may go on the daily chart as we are in uncharted territory right now. Furthermore, current price level is the result of a strong breakout from Channel Top, and we simply do not know how long this momentum can last. There is every single chance that price may pullback strongly as a knee jerk reaction, or continue higher due to the strong bullish breakout momentum. Hence, chasing the rally is also considered risky. Prudent traders may wish to wait for price to settle down and have price action form more support/resistances to allow us to better gauge where we may be heading next…

-Umesh Shanmugam