RBI does everything to glitter INR but pressurized from external macros

The Indian rupee has been relatively insulated from external pressures from US monetary policy and China. A narrowing in India's current account deficit from 2013 levels, lower crude oil prices (India is heavily reliant on crude imports), establishment of a formal inflation targeting framework at the RBI, and an economically reform-minded government have supported the rupee.

The latter has been positive for FDI flows, which rose by 41% in 2014. Insulated, however, does not mean immune.

Exports plunged by nearly 11% between April and August, suffering from generally softer global trade.

Pressure has built on the RBI to cut interest rates at its 29 September meeting, after wholesale prices declined by 5% in August but Raguram Rajan has absolutely different mindset to control over not only inflation targets but some serious issues revolving around Indian economy such as tax evasion (black money issues). We would summarize those points in our upcoming posts.

So, this comes as the finance ministry contemplates paring back some of the central bank's newfound independence. We also expect a modest rise in crude oil prices to add to the current account deficit. All of these suggest at least some modest depreciation in the rupee from recent levels.