USD/INR likely to hold at upper end of 64.50-65.50 range if equities continue to pull back, says Commerzbank

The USD/INR currency pair is expected to hold at the upper end of the 64.50-65.50 range equities continue to pull back leading to further net portfolio outflows, according to the latest research report from Commerzbank.

The rise in Q4 2017 current account deficit (CAD) is a reminder of the importance of oil prices for the Indian economy and for overall market sentiment. It climbed to USD13.5 billion from USD7.2 billion in Q3 which translates to 2 percent of GDP vs 1.1 percent in Q3 and 1.4 percent a year ago.

The surge was mainly due to the near 20 percent surge in oil prices in Q4 2017 on top of the 12 percent rise in Q3. Higher oil prices translate to a higher import bill as India imports 80 percent of its oil needs. The economy’s vulnerability to oil is seen via the balance of payments channel as well as via higher import prices. In other words, elevated oil prices will eventually feed through to higher import prices and inflationary risks.

There was some good news on the inflation front for February however as CPI inflation moderated towards 4.4 percent y/y from above 5 percent in the previous two months. Food prices are another key determinant for CPI apart from oil and the moderation last month was largely due to softer food prices.

"Going forward, we would need to track oil prices closely for implications on the current account deficit, oil prices, and overall USD-INR sentiment," the report added.

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