USD/INR: Excessive Indian rupee gains unlikely – MUFG

Analysts at MUFG Bank, forecast the USD/INR will trade at 73.500 during the third quarter rising to 73.750 by year-end and at 74.250 by the second quarter of next year. 

Key Quotes:

“The Indian rupee had its strongest monthly run this year in August rising by about 2.0% against the dollar buoyed by month-end flows. RBI’s relaxation of its foreign exchange absorption was another factor underpinning the currency last month. India’s foreign reserves had been on a strong growth path since mid-2019 from the improvement in the current account balance, and surge in portfolio flows.”

“Excessive Indian rupee gains are, however, unlikely given continued challenges in COVID-19 containment, ongoing financial sector risks, elevated stock positioning by foreigners, negative real yields, the adoption of unconventional monetary policy and rising oil price trends amongst others. Indian equities are highly vulnerable to any global stock correction, which will impinge on the rupee.”

“Even as India’s basic balance and overall balance of payments will likely hit historical highs this year, their derivation have in part been from economic weakness. India’s oil import bill is likely to increase in the second half of the year versus the first half as crude oil prices recover. After a rare June trade balance surplus, July saw a reversal back to the usual trend of a USD4.8bn trade deficit. Restraint for excessive rupee gains may also arise from the revised Economic Capital Framework pertaining to RBI’s capital adequacy.”