USD/INR likely to stabilize between 64-65 range in the near term, says Commerzbank

The USD/INR currency pair is expected to stabilize between a range of 64-65 in the near term, according to forecasts in a report by Commerzbank. Q2 2017 current account deficit (CAD) ballooned to the highest level in four years to USD14.3bn (2.4% of GDP).

At first glance, the headline appears alarming but the details, in fact, reveal a more positive tone. These include the blowout mainly due to a spike in gold imports ahead of the GST roll-out in July to over USD11 billion from below USD4 billion a year ago. The trade deficit subsequently jumped over USD41 billion from under USD30 billion in Q1 but it should moderate for the rest of the year.

Secondly, services continued to post positive inflows at USD18.2 billion and higher than a year ago, net foreign direct investment (FDI) nearly doubled from a year ago to a healthy USD7.2 billion. This is positive for INR in that the funding is less speculative and longer term in nature; and net portfolio inflows remained robust at over USD12bn, particularly to the debt market.

"This should persist for the foreseeable future given supportive global risk backdrop. If global liquidity is withdrawn at a faster pace, this will be one risk factor to watch. In other words, we are not likely to see a repeat of the twin deficit concerns of 2013 sparked by the Fed taper tantrum," Commerzbank commented in its latest research report.

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