USD/INR: Underperformance risk and capital outflows – MUFG

Michael Wan at MUFG highlights that the Indian Rupee entered the Iran conflict period already facing strong capital outflows, shaping its vulnerability. The Reserve Bank of India is reportedly considering measures to attract Dollar inflows, including a possible FCNR swap scheme and tax changes. MUFG projects USD/INR in a 95.00–96.00 range over 12 months, implying continued Rupee underperformance.

Rupee pressures and RBI support options

"Overall, the key message from us is that the starting point matters for the impact to each currency including in Asia, beyond just the direct sensitivity of the Strait of Hormuz and linkages to oil prices and energy shortages."

"On this front, the likes of the Indian Rupee and to a smaller extent Vietnam Dong were already facing strong capital outflows to begin the Iran conflict, and our continued bias is to as such see INR underperform across a range and distributions of scenarios."

"We had news reports from Reuters yesterday that the RBI is considering measures to attract more Dollar inflows, and among other steps the 2013 FCNR swap scheme coupled with elimination of withholding tax on overseas government bond investors are possible ways to support the Indian Rupee."

"We see USD/INR trading between the 95.00 to 96.00 over the next 12 months, implying continued FX underperformance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)