USD/INR to move lower during H1 and likely to recover – MUFG

Capital flows may help mitigate downward pressure on the Indian rupee during the next weeks according to analysts at MUFG Bank. They forecast USD/INR at 74.000 by the end of the first quarter and at 73.00 by the second quarter.

Key quotes:

 “The magnitude of the Indian rupee’s depreciation against the US dollar in January was the largest since September 2021, mainly driven by US dollar strength on rising market expectations of a more hawkish Fed, higher oil prices, and net equity outflows in part due to a potential delay in the launch of India’s largest IPO beyond March.”

“Downside risks for the rupee have risen as market expectations of more aggressive Fed tightening may result in more capital outflows in the near term, which could be exacerbated by the lack of a substantial pick-up in IPO-related inflows should there be delays in IPO launches. Downward pressure on the rupee can still be mitigated by net inflows into the bond market towards end-Q1 in anticipation of the potential inclusion of Indian sovereign bonds into a few global bond indices, followed by passive inflows following the official announcement.”

“With economic activity affected in the short term, we think it is premature for the RBI to raise the benchmark repo rate as soon as the next meeting on 9th February despite higher levels of inflation. But we think the RBI is likely to take more concrete action to mop up excess liquidity by hiking the reverse repo rate by 20bps to 3.55% in February, thereby narrowing the interest rate corridor.”