INR likely to trade with a weakening bias in January ahead of Union Budget, says Scotiabank

The INR is expected to trade with a weakening bias this month given ongoing portfolio outflows, ahead of the presentation of Union Budget FY2017-18 on 1 February and the RBI’s next MPC meeting scheduled for 7-8 February, said Scotiabank in its research note

Meanwhile, we believe the central bank will continue its two-way operations to smooth excessive fluctuations in local FX markets. The RBI sold net USD 418 million of foreign currencies in October after purchasing net USD 4.649 billion the prior month. The INR will not be squeezed by taking into account the nation’s low foreign ownership of Indian government bonds that was 3.82 percent only of total as of September 2016.

On the rates side, if the Indian government sticks to its fiscal consolidation path in Union Budget FY2017-18 to be presented on 1 February, the RBI will likely trim its policy rate by 25 basis points when reviewing its monetary policy on 7-8 February. The timing and size of further RBI rate cuts continue to depend on India’s inflation and growth trajectory and the Fed’s tightening pace.

The nation’s benign inflation would provide scope for a rate cut by the RBI next month, while the Fed is less likely to raise its benchmark interest rates again in the January-March quarter.

The Indian Central Statistics Office said last Friday that India's economic growth is estimated to slow to 7.1 percent in the current fiscal year ending 31 March 2017 compared to 7.6 percent the previous one. However, the figure did not reflect the impact of the demonetization move and are based on data for the period from April to October 2016 only. We reckon the final print should be even slower.

We note India’s onshore cash liquidity conditions have improved markedly. As about 80-90 percent of outlawed notes could be replaced by the end of February, India’s interbank funding costs are set to rise further in the weeks ahead. In addition, advance tax payment (the 4th instalment) typically tightens rupee interbank liquidity conditions in early March, although the RBI may roll out some measures to address the situation.

According to Union Budget FY2016-17 released on 29 February 2016, the current advance tax payment schedule for a company is 15 percent, 45 percent, 75 percent and 100 percent (cumulative) of income tax payable on the full financial year's income to be paid by 15 June 2016, 15 September 2016, 15 December 2016 and 15 March 2017 respectively.