USD/INR to continue moving higher – MUFG

The Indian rupee reach a record low of 81.950 against the USD in September on exceptional US dollar strength due to a hawkish Federal Reserve as well as a possibly smaller degree of intervention in the forex market by the Reserve Bank of India (RBI), explained analysts at MUFG Bank. They expect USD/INR to continue moving to the upside with a forecast of 84.00 by the end of the year. 

Key Quotes:

“The 13.5%y/y jump in India’s real GDP growth in CYQ2 was the strongest growth rate in a year, driven mainly by substantial increases in private consumption and gross fixed capital formation.”

“The double-digit growth rate in CY Q2 was also the consequence of low base effects and far lower than what we have initially projected. We have since revised our real GDP growth forecast lower to 6.7% from 7.6% prior for  FY22/23, and 5.8% for FY23/24 versus 6.6% prior.”

“The confluence of a stronger USD, deteriorating trade and current account balances for India, risks of a return in net portfolio outflows in Q4, and smaller scope for FX intervention point to further INR weakness ahead which would bring it to a new record low against the USD in the coming months after hitting a record low of 82.00 on 28 September.”

“Based on the latest available data, India’s foreign reserves have fallen by USD88.0 bn to USD545.7 bn. The magnitude of the decline in foreign reserves is close to the RBI’s USD100 bn threshold. This limits the scope for an aggressive pace of intervention in the coming months.”

“Our end-2022 USD/INR forecast is now at 84.00.”