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The USD/INR currency pair is expected to head for the 68 support or even lower levels, while keeping a close eye on oil prices and US-China trade tensions, according to the latest research report from Scotiabank. US President Donald Trump said at the White House that there’s still a "good possibility" of the US and China reaching a trade deal.
The Bhartiya Janata Party-led National Democratic Alliance (NDA) party will retain power for a second consecutive term with a historic landslide re-election victory in the 2019 Lok Sabha Election. PM Narendra Modi’s BJP party extended its lead in 301 seats, ahead of the 272 seats needed to form the new government and more than the 282 seats the party won in the 2014 election.
The Reserve Bank of India (RBI) is expected to maintain its pro-growth stance. The INR FRA curve is now pricing in a 18 basis points rate cut within one month, supporting Scotiabank’s call for a June rate cut.
In addition, Cogencis reported on May 13 that the central bank has been asked by the government to shift to a surplus-liquidity stance, which has dragged down the Indian government bond yields.
At present, however, there is still a slight liquidity deficit in the local banking system. It will boost Indian equities and bonds on hopes for more market-oriented reforms and further monetary easing, supportive of the INR in general.
Moreover, several regional central banks have pledged to curb herd behaviour in their local FX markets, which could help stabilize market sentiment to some extent. A drop in the DXY Index in Thursday’s NY session due to weak US manufacturing PMI could come as a temporary relief to EM Asian currencies.
Meanwhile, Bloomberg reported that the Trump administration is proposing tariffs on goods from countries found to have undervalued currencies. The proposal was laid out in a Federal Register notice released by the US Commerce Department on Thursday. The proposal will be able to prop up EM Asian currencies if risk sentiment improves, Scotiabank further noted.
