Continued rises in India’s foreign reserves likely to slow down the pace of INR appreciation, says Scotiabank

The pace of appreciation in the Indian rupee is expected to face headwinds from the continued rise in the country’s foreign exchange reserves, at a time when the USD/INR currency pair is trading at around a major support level, says Scotiabank.

The Reserve Bank of India (RBI) received an overwhelming response to its first 3-year USD/INR buy/ sell FX swap window on Tuesday, paving the way for more such auctions in the coming months. The central bank bought a targeted USD5 billion while injecting INR345.61 billion to the local banking system, with a premium of 776 paisa and a total bid of USD16.31 billion.

In the inter-bank market, the 3-year FX swap was quoted at around 770 paisa yesterday. The buy/sell FX swap will increase India’s foreign reserves by USD5 billion on March 28 and ease concern over a cash crunch typically seen before the beginning of a financial year on April 1.

In addition, the buy/sell FX swap has lowered implied INR interest rate, which could attract foreign inflows in the wake of reduced hedging costs.

The Conference Board on Tuesday said its index of US consumer confidence declined to 124.1 in March from 131.4 in February. Falling US consumer confidence and weak US housing data fuelled recession fears.

Meanwhile, mounting negative-yielding bonds could prompt foreign investors to pour more funds into Indian debt, propping up the INR along with equity investment inflows, the report also noted.

"We maintain our short USD/INR position targeting 68 while keeping a close eye on the upcoming general election and oil prices as both could weaken the INR abruptly," Scotiabank further commented.