USD/INR: RBI further easing and deterioration in terms of trade to place downward pressure on the rupee – MUFG

The USD/INR will likely trade in the 70.000-75.500 range during the first quarter and between 70.500-76.000 in the second quarter, according to analysts at MUFG Bank. They forecast USD/INR at 74.250 by the end of the year. 

Key Quotes:

“The Indian rupee was one of the only three Asia ex-Japan currencies to appreciate against the dollar in January despite the dollar’s rebound. The rupee’s resilience is partly attributed to relatively large equity inflows for the third consecutive month. A lot of good news, such as India’s status as the world’s vaccine manufacturing hub, has been priced. The rupee would be vulnerable to periodic pullbacks in equity flows given stretched valuations, although the slosh in global liquidity should still underpin foreign portfolio investment flows.”

“But as supply side risks to inflation remain, the RBI may refrain from cutting until inflation is seen to remain well within the inflation target range between 2-6%. This year, the RBI is expected to continue to conduct operation twists in order to keep a lid on yields that are pressured by another year of near record IGB issuances.”

“Prospects of further easing, and deterioration in India’s terms of trade due to higher oil prices would place downward pressure on the rupee, though losses would be cushioned by dollar weakness.”