USD/INR bounce likely to short-lived, RBI, US NFP eyed

The USD/INR spot did not have a good month of May, despite favorable seasonality conditions otherwise. But since the beginning of this week, there has been a bounce and dollar bulls have been active ahead of the US NFP data for a steer on the US outlook. The forex traders are looking for fresh catalysts as concerns linger that the recovery from the pandemic will stoke inflation and prompt global central banks to pare back policy support earlier than anticipated. This Friday is the Reserve Bank of India's Monetary Policy Committee outcome, so all eyes will be on RBI's outcome along with the key US payroll data.

The RBI meeting outcome is going to be interesting as there are apprehensions over inflation and continued uncertainty with regard to the second wave of the COVID-19 pandemic. For the fifth consecutive month, India's CPI data has come within the RBI's upper margin of 6%. And market participants forecast that inflation will remain check-in the coming months on the back of a normal monsoon. However, the volatile global crude oil prices can put upward pressure on inflation prints. But in our view, the RBI's focus will continue to be on the deteriorating economic outlook. The RBI's annual report, released last week, has already made it clear that "the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring that inflation remains within the target". So we don't expect the central bank to change its policy stance and will keep interest rates unchanged. The key lending rate, the repo rate, was kept at 4%, and the reverse repo rate or the central bank's borrowing rate at 3.35%. The USDINR spot won’t have much impact after the monetary policy until the central bank decides to infuse additional liquidity. The announcement of infusion of more liquidity while keeping the benchmark rates unchanged will be positive for the USDINR spot, but it looks unlikely at this week's policy.

Meanwhile, the dollar index has clung to small gains as a pickup in US manufacturing kept bets alive for a quicker normalization of Federal Reserve policy. So the fx market is split in its view on whether current inflationary pressures will be transitory like the Fed says it is, or inflation persist long enough to force policymakers to taper stimulus and raise rates earlier than they have so far signaled. Even if inflation continues to overshoot, we think the Fed will continue to say it's temporary.

Technically, as seen in the daily chart, the USDINR Spot after hitting a more than two months low of 72.31 during the end of May, made a reversal to currently trading at 73.20. Immediate resistance is at 73.25 (100-days moving average level) and strong key 38.2% Fibonacci Retracement level as well as 50-days moving average resistance is located at 73.50. However, we are expecting the 73.50-73.60 zone to be the reversal point for the pair and if it respected the same then on the downside support is seen at 73.0-72.70-72.50. However, if it consistently trades above 73.60 then only the next resistance is observed at 73.75. From the short-term perspective, the overall view will be sold on rising for traders.