USD/INR: Fed tightening should contribute to a weaker Indian rupee – Wells Fargo

According to analysts at Wells Fargo, the US Dollar should broadly strengthen against most emerging market currencies, including the Indian rupee as the Federal Reserve lifts interest rates and eventually shrinks its balance sheet. They forecast USD/INR at 74.50 by the end of the first quarter and at 75.00 by the third. 

Key Quotes: 

“India is currently experiencing a third wave of COVID infections lead by the Omicron variant, and early evidence suggests the renewed spread of the virus may be having a negative impact on economic activity. With that said, we do not expect another full-scale lockdown, and believe the economic effects of the current wave will be somewhat mild and rather short-lived. We do, however, expect inflationary pressures to build, and for core inflation to move above the upper bound of the Reserve Bank of India's target range in the near future.”

“As underlying inflation rises above the RBI's target range, we expect the central bank to turn more hawkish. To that point, we now expect policymakers to begin raising interest rates in Q1-2022 and to steadily tighten monetary policy over the course of this year.”

“Despite tighter monetary policy, we continue to believe the Indian rupee will weaken over the long term. Fed tightening should contribute to a weaker rupee; however, we expect depreciation to be gradual as the RBI would likely use its large stockpile of FX reserves to mitigate rupee volatility.”