USD/INR: Higher oil prices to limit the rupee upside potential – SocGen

The INR’s moderately bullish start to the year reversed in the past week on the back of higher oil prices. Economists at Société Générale expect the oil price risk to unwind only in a gradual manner and view it as a medium-term risk to the Indian rupee.

RBI’s policy response to a hawkish Fed to be sufficiently supportive of the currency

“Supply bottlenecks are expected to unwind in a gradual manner, and higher energy/commodity prices are likely to persist in the near term and this is detrimental to the INR.”

“Given the significant rise in covid active cases since December, some localized restrictions have been proposed. However, the increase has been moderate. We also expect government-imposed restrictions to remain modest and for the rising number of infections to have a limited impact on the economy, the INR and rates.”

“ IPO-related foreign inflows amounted close to $11bn in 2021 and we expect this strong momentum to continue in 2022, especially with the potentially largest IPO (LIC) in the pipeline. In addition, upside risks to bond inflows related to bond index inclusion remain as well and this is positive for FX and bonds, especially in the long end.”

“The INR exhibits a high sensitivity to policy rate differentials vs the US, and hence we expect any rate hike from the RBI to be moderately positive for the currency.”