USD/INR: RBI will likely resume preference for a weaker rupee – Credit Suisse

The US dollar will likely continue to trade versus the Indian rupee in the 74/76 trading range during the first quarter, according to economists at Credit Suisse. They are optimistic about the outlook for the Indian economy. 

Key Quotes: 

“In Q4 we expected higher USDINR as India’s strong re-opening momentum was likely to boost imports and further widen the trade deficit. As such we did not anticipate the late December rally in INR (from 76 per dollar to 74). However we still think the 74-76 trading range will persist in Q1.”

“Although the rupee has weakened against the dollar by 30% since 2011, the cumulative impact of years of high inflation has eroded any competitiveness gained from a weaker rupee. INR REER (Real Efective Exchange Rate) has traded in a steady range since 2017, when RBI began accumulating FX reserves more aggressively."

“We think the RBI is managing the currency for REER stability. Although the RBI intervenes to enforce a narrow USDINR trading range (which we currently think is 74-76), over time this range gradually shifts higher as the RBI aims for steady inflation-adjusted currency competitiveness.”

“We remain optimistic on the outlook for Indian GDP, but that optimism (and associated high investment and consumption) amid re-opening is actually negative for the trade balance and INR.”