USD/INR likely to consolidate between 70-72 for now, says Commerzbank

The USD/INR currency pair is expected to consolidate between a range of 70-72 for now, as it holds around the 71.10 level currently, according to the latest research report from Commerzbank.

The federal election is just three months away to be held in April-May this year. As such, the upcoming federal budget on February 1 will be its last for the Modi government. The poor performance and surprised defeats for the ruling National Democratic Alliance (NDA) in the three state elections last year have raised the prospects of Modi losing power in the federal polls.

This was unthinkable when NDA swept to an emphatic victory in 2014, winning 336 of the 543 Lower House seats. With the opposition Congress Party gaining momentum, this Friday’s budget is expected to turn more populist and provide more support for the rural sector.

This is on top of revenue shortfalls, namely over lower than expected GST revenue and proceeds from the sale of shares in state-owned companies. As such, the government’s fiscal consolidation aim could come under pressure.

The government would have to rely on special dividends from RBI to help keep the fiscal deficit around the 3.3 percent mark for the current fiscal year 2018-2019.

"We will watch this closely as a more uncertain federal election result and concerns over the fiscal picture could weigh on sentiment towards INR. The third key factor that will dictate INR will be oil prices," the report added.