Outsized Move For INR Post-RBI

Rupee weakened sharply yesterday after the RBI rate announcement, posting the biggest one day decline since August 2019. USDINR 1-month NDF volumes were 130% above the 30-day average overnight, while liquidity density was in line with average conditions. MNI contacts note that the move in INR is particularly aggressive, even given the RBI rate announcement/guidance, flow is said to have been quiet in the Asia morning session and suggesting the move has happened on the back of positioning. Furthermore, the commitment by the RBI to purchase INR 1tn of government securities in the secondary market should ease concerns over USD upside. Some have noted that the plan to buy bonds could result in a liquidity glut.

• ING notes that "RBI Governor Das added to the sense of dovishness by noting that this was not going to be a one-off exercise and that this could continue until conditions improved. So expect INR1tr to become INR2tr next quarter etc. One possible catalyst for yesterday's decision could be India's daily case numbers of Covid-19, which have taken India to the unenviable position of the world's most infected country on a daily basis, and resulted in the restoration of regional restrictions (so far Maharashtra but more viewed as possible) which is bound to weigh on economic activity. That said, low official and market rates have not done much to bring down bank lending rates, so it might be a push to suggest that this latest move will offset the Covid-19 impact by boosting lending and real activity, though it will provide banks with fatter liquidity buffers, keep bond yields suppressed, and the currency weak."