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The USD/INR currency pair is expected to stay above the 68.2 support in the weeks ahead. Technically, the pair will fluctuate gradually lower within the pennant and test the support level later, according to the latest research report from Scotiabank.
The RBI’s pro-growth stance has improved onshore rupee liquidity conditions, which will bring down local bond yields further going forward. The market has priced in a 25 bp rate cut at the August 7 RBI policy meeting.
In addition, The Economic Times reported on Monday that Indian finance minister Nirmala Sitharaman called for a "significant" reduction in the central bank's policy rate in an interview with the newspaper, saying "it would do a lot of good for the country."
Portfolio inflows chasing the INR-denominated bonds for higher returns will continue propping up the INR, while falling shares due to concerns over the "super-rich" tax keep weighing on the high-yielding currency, the report added.
However, both Sensex index and Nifty50 index have been oversold according to the RSI index, signaling rising odds of technically corrections.
The RBI on Tuesday relaxed norms on end-use of funds raised through external commercial borrowings (ECBs), which could prompt corporates including non-banking finance companies (NBFCs) to seek cheaper offshore funds. It will be supportive of the INR exchange rate in general.
Indian and Pakistani soldiers on Tuesday traded heavy gunfire across a cease-fire line dividing Kashmir, which may only impose a temporary downward pressure on the INR.
"We maintain our short USD/INR position, although the RBI replenishing its foreign reserves will continue to slow the pace of appreciation in the INR," Scotiabank further commented in the report.
