Standard Chartered notes : We expect a limited impact on USD-INR, as the RBI policy announcement was largely in line with market expectations. Interestingly, the policy highlighted the negative impact of INR real effecti…
We expect a limited impact on USD-INR, as the RBI policy announcement was largely in line with market expectations. Interestingly, the policy highlighted the negative impact of INR real effective exchange rate (REER) gains on export margins.
According to our estimates, the REER-36 measure is likely to increase another 0.9% in March. India's exports contracted 15% y/y in February.
While the decline was due partially to weak global demand and low commodity prices, the INR's trade-weighted overvaluation likely also played a role ('Indian importers - Buy USD-INR funded call spreads', 2 April 2015).
Separately, we think the proposal to permit Indian corporates to write covered options is a positive development that will likely improve market liquidity in the currency options markets while also encouraging further hedging of FX exposures.
We expect USD-INR to trade higher from Q2-2015, owing to a combination of seasonal factors, positioning, risk reduction and continued intervention by the RBI to offset elevated INR REER levels. Our USD-INR forecasts for Q2-2015 and Q3-2015 are 64.50 and 63.75, respectively.
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