USD/INR: Indian Rupee is overvalued, scope for gradual depreciation ahead – TD Securities

Analysts at TD Securities forecast the USD/INR pair at 72.60 during the fourth quarter, at 73.00 in Q1 2020 and at 74.00 in Q3 2020. 

Key Quotes: 

“RBI cut its policy rate by 25% to 5.15% in October and maintained an accommodative stance. This was the fifth straight cut from the RBI. RBI sees an improved outflook for food inflation and persistence of weak demand conditions but sees volatile oil and market risks and upside risks from geopolitical tensions.”

“As RBI continues to forecast CPI below target they see further monetary policy space to address growth concerns. However, after 135bp of easing in this cycle the RBI may wish to wait to assess the impact of past rate cuts before easing again. We maintain our view that the next move is likely in Q1 2020.”

“INR has been a relative underperformer this year among Asian currencies and has also maintained a high degree of sensitivity to CNY movements as India’s trade deficit with China has grown. Given our view that CNY will weaken further over the months ahead, prospects for INR do not look particularly rosy.”

“We think RBI may not be overly concerned about INR depreciation and in fact may actually favour FX weakness as a means to stimulate exports and the economy, especially as the pass through to inflation is relatively low. The fact that INR is overvalued by many measures also suggests scope for some, albeit gradual depreciation in the months ahead.”