Indian Rupee Outlook (INR)

The Indian rupee has been one of the most stable currencies in Asia-Pacific this year, but its stability is expected to be short-lived, according to UBS.

Swiss investment bank strategists said in an August 25 note that they expected the Indian currency to weaken to $ 77 by the end of the year (more than 5% lower than current levels) and will depreciate to 79.5 in September 2022.

“We see that the current INR stability so far is short-lived,” UBS said, adding that a decline in US bond yields lent stability to currencies such as the rupee.

On Friday, the rupee changed hands at around 72.98 per dollar, up 0.19% from January levels and appreciating from levels around 74.11 last month.

The rupee resistance has been mainly driven by two factors, according to Gaurang Somaiya, currency analyst at Mumbai-based diversified financial services firm Motilal Oswal.

“First, consistent fund flows were positive for the rupee and second was the [Reserve Bank of India] he bought dollars to build his reserves and prepare for any volatility, ”he told CNBC.

Somaiya added that fund flows were not only led by foreign institutional investors, but also through a consistent flow of foreign direct investment.

FDI’s equity inflow into India grew 168% year-on-year to $ 17.57 billion between April and June, the first quarter of India’s 2022 fiscal year. This refers to foreign money invested in Indian markets and companies and is debt free.

“Fund flows have been one of the main reasons that have helped the rupee to earn consistently,” Somaiya said. He noted that between August last year and now, the rupee has been trapped in a relatively wide range of 72 and 75 against the dollar.

This suggests the RBI has been “very active in managing the volatility of the rupee,” using its interventions to increase its foreign exchange reserves to historic highs, he said. The latest data showed that as of August 20, the RBI had about $ 616.9 billion in foreign exchange reserves.

Somaiya said he expects the rupee to appreciate in the short term, after strong gains in the domestic stock market. He predicted that the currency could appreciate to levels close to 72.20 against the dollar by the end of the year. In 2022, the rupee is expected to trade around the 73.50 to 74 level as the US currency strengthens.

Last year, India recorded a current account surplus for the first time in more than a decade due to a collapse in domestic import demand as a result of the pandemic. This meant that the value of incoming goods, services and investments in India was less than the amount left by the country.

In the first three months of this year, India’s current account deficit widened to $ 8.1 billion, or 1% of GDP, as the economy slowly recovered.

UBS strategists said India’s quarterly current account balance has deteriorated rapidly from last year, driven by a rise in oil prices.

“Given our expectations about India’s current account deficit, which will persist in a range of 1-1.5% until 2022, we expect that [rupee] to press when U.S. yields start to rebound to 2% by the end of the year, ”they said.

British investment bank HSBC has a more positive outlook on the Indian currency. He expects the rupee to reach 73 against the dollar by the end of the year and says the currency will likely end up flat at the end of 2020 level. In the longer term, the bank expects a modest weakness where the rupee could weaken to 75 against the dollar.

HSBC expects the rupee to hold “relatively well” in a stronger dollar environment as persistent FDI inflows and better foreign exchange reserves will help the currency withstand external headwinds, CNN strategist Madan Reddy told of Asia change to HSBC Global Research.

“Uncertainty surrounding the slowdown in sequential global growth and the normalization of Fed policy should be abandoned [rupee] as surpassing Asia, ”he said.

U.S. Federal Reserve Chairman Jerome Powell said last month that the central bank is likely to begin withdrawing some of its easy money policies before the end of the year, although it still sees the rise of interest rates at a distance.

Reddy said the likelihood of tightening monetary conditions in the United States and a widening of India’s current account deficit points to a couple of dollars / rupees higher. But, he added, the excessive weakness of the rupee is less likely, as the RBI would end the elimination of excess liquidity from the economy and restrict inflation expectations.

He noted that central bank foreign exchange purchases in recent years have helped suppress long-term repayment expectations among local traders.

“In our view, RBI’s foreign exchange policy will continue to be a key driver of the rupee’s performance,” Reddy said, adding that he sees little incentive for the central bank to tolerate the rupee’s strength as long as capital inflows they are not broad-based.

“At the moment, it looks like the RBI is comfortable [dollar/rupee] oscillating within its 72.5-75.5 year-over-year trading range, ”he said.

Somaiya, of Motilal Oswal, added that national factors such as the recovery in growth are more favorable to a stronger rupee, but global factors could limit gains against the dollar.