India rupee limited downside in near term

Indian Rupee (INR) was one of the better performers in July with a decline of "just" 0.83% against the USD. The performance was consistent with our constructive view of INR. Domestic data in the month of July was also, on balance, a little better than expected, culminating in an unchanged interest rate decision by the RBI in early August.

"The RBI is expected to be on hold until Q1 2016. This compares to consensus, which has ~10bps of cuts discounted by yearend. The RBI's front loading of policy action in June put the central bank ahead of the curve, in our view", says RBC capital markets. 

The outlook for growth is improving gradually and the inflation risks are balanced. One of the biggest upside risks to inflation is increasing inflation - ex food and fuel. Meantime, food prices have also risen sharply in recent months and bear monitoring.