Emerging Markets: Reserve Bank of India See Rallies in USD/INR

Emerging Markets: Reserve Bank of India See Rallies in USD/INR

A major issue facing the Reserve Bank of India is $133 billion in stressed assets owned by the banks after years of reckless lending practices. Archaya, the new Deputy Governor of the reserve Bank has proposed structuring “bad bank” type structures to buy back and restructure these assets.

Archaya has warned although India is not in crisis mode yet, without taking action, they could find themselves in a position similar to Japan in the mid-1990s or the current position Italy finds itself in.  Fitch has said it would not be likely for this public/private partnership to buy back the assets to work unless the government will be able to put $10.4 billion back into the sector by March 2019.

An issue the government will face with this policy is currently the political power is under criticism for supporting corporate India at the expense of workers. The policy made to prop up ill managed banks might be extremely unpopular, so it will be important for forex traders to watch these moves unfold over the next few months. Currency pairs like the USD/INR tend to be more volatile than the major currency pairs, so newer traders should start with a forex demo account before establishing large positions in these types of forex trades.

India’s Economy

Archaya did proceed to outline certain parts of the Indian economy he was bullish on and made the point past poor decisions from the banking sector should not hurt the potential in these areas. Some examples were a healthy current level of growth and future potential, hard-fought macroeconomic stability, youth climbing echelons of entrepreneurial success, vast expanses of rural India that need infrastructure and modernization, and steadily declining levels of poverty (Financial Express).

In more general news, at its last meeting, the Reserve Bank voted to keep interests rates at the same level and unchanged. This was slightly surprising as many expected a small cut in reaction to the Indian economy’s weighed down economic growth.

Changing Monetary Policy

The Governor (Urjit Patel) outlined rising inflation as a potential concern in reaction to recent demonetization and perishable foods sale. Goldman Sachs was not surprised by this decision and said, “RBI’s relatively more hawkish tone at this meeting and their goalpost of achieving 4% inflation over the medium term support our view that there are no further rate cuts likely in this cycle.”

They continued to say of a potential future rate hike, “We expect headline inflation to hover at the upper end of RBI’s target band. Further, abundant liquidity following demonetization, easing lending rates, demonetization’s potentially transient impact on growth, the global reflationary environment and higher U.S. bond yields, are all likely to keep the RBI on hold.”

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