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The USD/INR currency pair is expected to remain well supported within the 68-69 range in the short-term; however, a more hawkish RBI that paves the way for yet another hike in Q4 could provide some temporary respite, according to the latest research report from Commerzbank.
INR’s weakness is driven by a number of factors, including the firm USD backdrop, knock-on effects from CNY’s weakness which is dragging down other Asian currencies and higher oil prices with NYMEX crude oil up 8 percent this week to above USD73.
The bottom line is that India imports 80 percent of its oil needs and is always vulnerable to gyrations in global oil prices. This is all the more pertinent given signs of a strong economic rebound with Q1 2018 GDP expanding 7.7 percent y/y and 4) continued net foreign portfolio outflows.
For example, total net portfolio outflows for both the equity and debt markets amounted to USD2bn so far in June and USD6.7 billion year-to-date. This is a reversal of total net inflows of USD31 billion in 2017.
Meanwhile, one question to comes to mind is the Reserve Bank of India (RBI) adopt another rate hike in August help to stabilize the INR. It may not as the market is already pricing in a 25bp hike to 6.5% in the next three months.
