USD/INR: Indian rupee to continue to head lower towards year-end – MUFG

Analysts at MUFG Bank remain bearish on the Indian rupee in the near term amid further interest rate hikes from the Federal Reserve. They forecast USD/INR at 84.000 by the end of the fourth quarter and at 82.50 by the end of the second quarter of next year. 

Key Quotes:

“The Indian rupee tumbled to a record low of 83.290 against the US dollar in October despite market expectations for a less hawkish Fed policy update. This is in addition to prospects of India’s oil imports remaining expensive following OPEC+’s decision to cut daily oil production. We remain bearish on the rupee in the near term in view of further Fed rate hikes, relatively large trade deficits for India, narrower scope for aggressive RBI intervention, and investors’ disappointment that inclusion into global bond indices was pushed back.”

“Latest available data show India’s foreign reserves declined by USD 4.3bn to USD 528.4bn in the first half of October from a USD 28.4bn drop in September. This represents a year-to-date decline of USD 105.2bn, which may be beyond the RBI’s threshold. Subsequent rounds of intervention are likely to be done more sporadically, which raises the risk of a pick-up in FX volatility and further rupee weakness.”

“We think the RBI is likely to hike the benchmark repo rate by 50bps at the upcoming meeting on 7th December to shore up the rupee and curb inflationary pressures. But there are risks of a less hawkish RBI as the 30th September RBI meeting minutes revealed two dissents within the six-member MPC favouring a terminal rate at 6% or less.”