USD/INR likely to drift higher in near-term given rate cut expectations and cautious growth backdrop, says Commerzbank

The USD/INR currency pair is expected to drift higher in the near-term given rate cut expectations and the cautious growth backdrop, according to the latest research report from Commerzbank.

The Reserve Bank of India (RBI) cut rates as expected yesterday by 25bp to 5.75 percent and shifted to a dovish bias. Governor Das stated explicitly that the focus is now squarely on growth concerns rather than inflation.

This point was accentuated after the weak Q1 GDP growth. When Governor Das began his tenure by cutting rates in February this year, some questioned his motives. Some were sceptical on whether he was succumbing to government pressures to cut ahead of the general election in May.

A few months later, Governor Das is now portrayed as being well ahead of the pack. This is because of the dovish turn by the Fed and rate cuts by other Asian central banks. RBI downgraded the growth forecast for fiscal year 2019-2020 slightly to 7.0 percent from 7.2 percent previously and expects inflation to remain below the 4 percent mid-point target at 3.3 percent.

"As long as oil prices and INR are stable, we expect RBI to cut by another 75bp to 5 percent in the remaining three meetings this year," the report added in his comments.