Oil prices have recovered significantly overnight; however, they continue to be under downward pressure in the midst of rising fears of an economic deceleration and an oil glut, noted Scotiabank in a research report. Leveraged funds further eased their net long crude oil future positions in the week through 18 December, while the contango term structure implies market expectations of even lower oil prices going forward.
Subdued oil prices have cut worries regarding India’s inflation outlook and current account deficit, supportive of the Indian rupee. On Thursday, the Reserve Bank of India will buy INR 150 billion worth of government bonds via open market operations, bringing its total liquidity injection to INR 500 billion for December.
The RBI will also purchase INR 500 billion of government bonds in January via five auctions of INR 100 billion each, suggesting that a similar amount of bond purchases in the following two months is likely, said Scotiabank. The OMO scheme is a mini-QE, which could stimulate local bond prices and the INR as well.
“We maintain our short USD/INR position with a target of 68 and a stop of 72, while staying nimble in the run-up to the next general election in India due by April/May 2019”, added Scotiabank.
