USD/INR to head towards 73.50 by year-end – ANZ

Economists at ANZ Bank expect modest appreciation pressures to continue to guide USD/INR to 73.50 by end-2020. RBI’s strong FX intervention is the only major hindrance to material rupee appreciation. 

Key quotes

“India’s external position is set to improve further, with a sizeable current account surplus in Q2 and likely also in Q3 2020. In addition, FDI flows remain robust, whereas portfolio flows have turned positive. While debt flows continue to be positive at the margin, equity inflows of $5.5bn month-to-date has made overall flows supportive of INR appreciation. A balance of payments surplus this year is therefore highly likely.” 

“While the pandemic is an evolving risk for domestic growth and asset prices, we believe much of the downturn in growth will be felt in Q2 2020. A nascent recovery is underway and the Q2 GDP print will likely be the trough. Unless growth slumps deeper than what markets already factor in (a 5-7% decline for the full-year), further rupee underperformance on this account is unlikely. The virus trajectory will be key for this outlook.”

“Persistent FX intervention by the RBI has been the key reason for the INR failing to appreciate materially. FX reserves now stand at $538bn, a $40bn increase since early June with the central bank having mopped up much of the inflows.”

“On balance, we feel that while appreciation pressures are strong on the rupee, large-scale FX intervention continues to be a limiting factor in the near-term. We expect USD/INR to slowly march lower towards 73.50 by December 2020.”