USD/INR likely to stay above 68.2 support in weeks ahead, to resume downward trend in medium term: Scotiabank

The USD/INR currency pair is expected to stay above the 68.2 support in the weeks ahead but will likely resume its downward trend in the medium term as accommodative external liquidity arising from major central banks re-expanding their balance sheets later this year will prompt overseas investor to chase the INR-denominated assets for higher returns, according to the latest research report from Scotiabank.

Foreign portfolio investors (FPIs) have been dumping Indian stocks month-to-date, weighing on the high-yielding INR. They pulled out USD 1.48bn from Indian equity markets in the month so far, largely due to the "super-rich" tax announced in the FY2019-20 Union Budget that was unveiled on 5 July. FPIs had been net investors in the equity segment in the previous five months.

In addition, RBI Governor Shaktikanta Das said in an interview with Bloomberg on July 20 that future interest rate cuts would depend on incoming data. His remarks have pushed up the Indian government bond yields, sparking bond portfolio outflows and undermining the INR, the report added.

While the cautious stance of RBI Governor Das on future rate cuts could dent market sentiment in the near term, India’s benign inflation outlook does provide scope for the central bank to lower its policy rate again on August 7 to spur economic growth.

Moreover, the IMF on Tuesday further slashed its annual growth forecast for India on weaker domestic demand, expecting the economy to expand 7.0 percent and 7.2 percent respectively in 2019 and 2020, a downward revision of 0.3 percentage point for both years from its April projection. Earlier in April, the Fund cut India’s growth outlook for 2019 and 2020 by 0.2 percentage point each to 7.3 percent and 7.5 percent respectively.

"We maintain our short USD/INR position. Technically, the pair is expected to fluctuate gradually lower within the pennant. Meanwhile, the RBI replenishing its foreign currency stockpile will continue slowing the pace of appreciation in the high-yielding currency," Scotiabank further commented in the report.