Indian Rupee: Higher profile after hawkish RBI – MUFG

MUFG’s Michael Wan highlights that FX measures to attract US Dollar (USD) inflows into India have significantly lowered Indian Rupee (INR) rates via added liquidity, with limited impact on USD/INR. Following more hawkish August Monetary Policy Committee (MPC) minutes, Wan expects the Reserve Bank of India (RBI) to have ended its easing cycle and to start hiking rates by 50bps from December, supporting a view that INR rates should move higher.

RBI stance points to rising INR yields

"In Asia, another key example where there has been intervention is in India, with the FX measures to draw Dollar inflows including through the FCNR(B) route having quite a meaningful impact on lowering INR rates through an influx of liquidity and to a much smaller extent USD/INR."

"Moving forward, we think that there’s a good chance INR rates move higher from here, and we like paying INR 5y NDOIS (current: 6.467%) as a potential way to express that view."

"First, the August MPC minutes was more hawkish than the actual policy meeting and also what markets expected, and also suggests the RBI has reached the end of its easing cycle with the next move higher rather than lower."

"We continue to expect RBI to hike rates by 50bps starting in the December meeting, with domestic growth remaining quite robust, credit growth accelerating, the lagged mipact from earlier oil price increases, fiscal policy supportive with a likely wider fiscal deficit, coupled with possible interaction with adverse weather events."

"Second, the early closure of the FCNR(B) facility also suggests that the incremental market pricing from here is for liquidity absorption by the RBI and less room for lower rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)