During the last week of August INR strengthened and broke the 74.5 level. This occurred for two reasons; USD weakness and India operation twist policy to reduce yields on the long end of the curve. Fiscal concerns led long-dated yields to still rise despite rate cuts and so India central bank intervened to keep them low. This operation is similar to QE but without the central bank expanding or contracting the balance sheet as buying and selling of instruments net out. This assists businesses and individuals to borrow cheaply for longer.
India GDP annual growth rate came at a contracted rate of 23.9% for Q2 and it is also expected to be negative for Q3 putting the country into a recession phase. India ranks third as the worst affected country by the pandemic. Unemployment rate improved from 23.5% in May to 11% in June. Inflation still persists around the 7% level, therefore it makes central bank decision to further cut rates much more difficult as the real rate of interest in already negative (4% Interest rate – 6.93% Inflation = -2.93%). Year to date, USD gained by 4.9% against INR.
The 74.5 support level breach is expected to be short-lived as further woes are expected for India. Such woes include increased tension between Hindu-Muslims and increased tensions in the China-India border. USDINR should return to the 74.5 and 77 level range even if USD weakens.