(03 JUNE 2019)DAILY MARKET BRIEF 2:INR rebound is about to turn
Optimism over the reelection of PM Narendra Modi business-friendly policies for a second five-year term and a rebound of manufacturing PMI at 3-months high have given INR a big push in the past few days. There is however good reasons to adopt a more bearish approach looking ahead, as the Reserve Bank of India rate decision from Thursday or rising trade tensions should go against INR.
The release of 1Q GDP at 5.80% (prior: 6.60%), largely below consensus of 6.30%, and lowest in five years due to a slowdown in major components agriculture and manufacturing, confirms the view that a recovery for 2Q is subdued. Despite a rebound in May manufacturing PMI, maintained in growth territory for the 22nd consecutive time, it appears that the gauge is largely influenced by recent election headlines as foreign order demand fuels needs for Indian firms to ramp up production. Yet the new administration will be facing tough challenges as election promises to boost the economy (i.e. more aggressive lending to support rural areas, expand tax cuts for middle-class families) needs to be balanced amid larger borrowing and a wider fiscal deficit (expected along 3.40% of GDP in 2019). The RBI should therefore play an important role in that regard, as lower interest rates should ultimately support Indian government fiscal policy, at the expense of the Indian rupee though. Accordingly, we should expect the RBI to announce a third consecutive 0.25 percentage point rate cut of its Repurchase rate on Thursday. There is therefore much to be expected in taking long positions on USD/INR looking forward, as fears of trade disruptions would also threaten India’s economic growth.
