USD/INR: Indian rupee to face downward pressure again towards year-end – MUFG

Analysts at MUFG Bank expect the USD/INR pair to trade at 71.00 during the current quarter, at 71.50 over the first quarter of next year and at 72.50 by the third quarter of 2020. 

Key Quotes:

“The Indian rupee was the worst performing Asia ex-Japan (AXJ) currency for the second consecutive month in November. Most of the rupee’s losses were recorded during the first half of November, driven by narrowing real yields, and risk aversion due to US-China trade deal pessimism, sluggish India data releases, and Moody’s decision to downgrade India’s sovereign debt rating outlook to “negative” from “stable” with the rating kept at Baa2 on 7th November. Rupee weakness came amid a 1.7% m/m increase in the foreign reserves to a fresh record high of USD448.3bn as at 15th November. The acceleration in headline CPI to 4.62% y/y in October drove real yields lower to 0.5%, which is the lowest since July 2016 and possibly below the RBI’s comfortable threshold range for keeping a stable rupee. This partly explains the net sell-off in Indian government bonds in November versus a net inflow in October.”

“The rupee’s slight recovery during the second half of November was mostly driven by merger and acquisition flows, which is one of the reasons why India is one of the only two AXJ countries other than Taiwan to record a net inflow into equities in November. With such flows likely to be one-off, the rupee will face downward pressure again towards year-end as global and domestic risk sentiments remain weak and India’s real yield fall further in view of another 25bps cut to the benchmark repo rate by the RBI at the next meeting on 5th December.”