India: Rupee falls despite RBI rate cut amid drought fears

The Reserve Bank of India's rate cut on Tuesday (2 June) failed to boost share markets and the rupee as the move has already been priced in. In addition, the central bank statement signalled further cuts would not be easy to come.

"The 25 basis point reduction in the repo rate was in line with expectations. If anything, it was a little less than expected, as a section of the market was also expecting additional easing in SLR (statutory liquidity ratio) etc," K Chandrangathen, chief forex dealer of South Indian Bank, told IBTimes UK.

The RBI slashed the repo rate, the overnight rate at which the central bank lends to banks, to 7.25% at the 2 June meeting. The USD/INR rose to 63.86 from the previous close of 63.62, moving further off the six-day low of 63.57 touched on Monday.

Chandrangathen also said the market's expectations of further rate cuts have waned after Tuesday's statement in which RBI governor, Raghuram Rajan, said India's disinflationary path has to continue and monsoon rains should be better to consider more rate cuts.

Meanwhile, a government forecast of weather conditions showed monsoon rains this year will be 88% of long- term average, meaning there are drought risks looming large over many parts of the country.

The forecast in April was for 93%. A number below 90% means a drought year, so if the forecasts come true, this year will be inflationary for Asia's third largest economy.

The main Indian share indices fell more than 2% in response to the RBI action on Tuesday.

Traders said the rupee also tracks the global scenario, mainly the broad dollar performance and crude oil.

A USD/INR derivatives trader at a state-run bank told IBTimes UK: "If the euro weakens further, then the RBI may release its hands off the 63.20 mark where the central bank, of late, has been selling dollars to keep the local currency supported."

A big picture chart analysis suggests that the USD/INR has more risks on the higher side. As long as 63.15 is held on the downside, the pair will keep its chances of hitting 65.0 and above in the coming months. (Please look at the chart given below).

With the rise on Tuesday, the pair has snapped a four-day losing streak and seems set to hit 64 and above in the coming days. The immediate support is 63.50/40 and resistance 64.10/15. However, 63.12/15 is the most important support as of now, which if broken, levels like 62.55 and then 62.0 would be easy to hit.

An analysis of the monthly chart shows that the USD/INR has the potential to rise to 66.0 before finding strong channel resistance, which if broken, 68.0 will be the next level to watch.