Continued rises in India’s foreign reserves likely to slow pace of INR appreciation when USD/INR trades at major support level, says Scotiabank

Continued rises in India’s foreign reserves is expected to slow the pace of the INR appreciation when the USD/INR currency pair is trading at around a major support level, according to the latest research report from Scotiabank.

India’s CPI inflation accelerated to 2.86 percent y/y in March from 2.57 percent y/y a month ago, above market estimate of 2.80 percent. However, the nation’s retail inflation is expected to remain relatively benign going forward. India Meteorological Department (IMD) said on Monday that monsoon rainfall is likely to be 96 percent of the long-term average this year.

RBI Governor Shaktikanta Das said on the sidelines of IMF-World Bank spring meetings on Friday that India must grow faster to reduce poverty and address other challenges and that central banks need to be more flexible on the size of their interest-rate moves.

Comments from Governor Das suggest the RBI could ease its monetary policy further in the months ahead to spur economic growth, which are supportive of local equities, bonds and the INR.

India’s trade deficit came in at USD10.89 billion in March, bringing the nation’s Q1 trade balance to a USD35.21 billion shortfall. It shrank from USD46.88 billion the previous quarter or USD41.48 billion a year ago, which will lead to a narrower Q1 current account deficit due in June and improve the nation’s basic balance.

"The INR has been range trading amid a mix of equity inflows and bond outflows. However, we maintain our short USD/INR position targeting 68 while keeping a close eye on the ongoing general elections and oil prices as both could move the INR abruptly," Scotiabank further commented in its report.