Modest upside pressure on USD/INR likely in coming months

In the past month, the Indian rupee has remained almost unchanged against the USD despite the RBI lowering its key interest rate by 25 basis points. The stability in rupee, to a larger degree, shows reform efforts aimed at stimulating portfolio flows and FDI.

However, the decision of the Indian central bank affirms the earlier notions that the new Governor Urjit R Patel favors growth over curbing inflation. Currently, the much weaker than anticipated second quarter growth and a good monsoon season limiting inflation justify the central bank’s reduction of the interest rate.

That said, the RBI has not ruled out additional reductions in interest rate and there are rising concerns that the RBI’s new found impartiality is under threat, said Lloyds Bank in a research note. Thankfully, external pressures before a possible hike by the Fed in December have been reduced extremely since the taper tantrum period of 2013. Thus, only modest upside pressure is expected on USD/INR in the months ahead, added Lloyds Bank.