USD/INR: Indian rupee to gradually depreciate – Wells Fargo

According to analysts at Wells Fargo, the Indian rupee will gradually depreciate versus the US dollar over the next quarters. They forecast USD/INR at 74.25 by the fourth quarter, and at 74.50 by the second quarter of next year. 

Key Quotes: 

“India's economy continues to demonstrate a rebound; however, we maintain our view that the rupee will gradually depreciate over the course of our forecast horizon. The Q2 slowdown in India's economy was severe, although high frequency indicators of mobility and activity are back above pre-pandemic and pre-second wave of infections levels.” Given the rebound, we forecast India's economy to rebound sharply in Q3, though we still believe the economy is fragile.”

“As a result of a fragile economy, we expect the Reserve Bank of India (RBI) to keep monetary policy accommodative over the course of our forecast horizon in an effort to prioritize growth. Accommodative monetary policy through 2022 should keep depreciation pressure on the rupee for the time being, especially as peer emerging market central banks continue to raise interest rates. Modest inflationary pressures should also provide justification for the RBI to keep interest rates on hold.”

“We also expect the RBI to intervene in FX markets in favor of a weaker rupee in an effort to support India's export sector and the broader economy. As the RBI grows its FX reserve position the rupee should weaken; however, as mentioned, we forecast any softness in the currency to be relatively gradual in nature.”