USD/INR: Downward pressure on the Indian rupee is expected to be modest – MUFG

The demand for Indian risk assets rose in August, explain analysts at MUFG Bank. They forecast USD/INR at 74.00 by the end of the third quarter and at 74.5 by the fourth quarter.

Key Quotes:

“The Indian rupee was the second best performing Asia ex-Japan currency in August. US dollar weakness on signals from Fed Chair Powell that the central bank is not in a hurry to taper QE only helped lift the rupee marginally. Most of the rupee’s gains were recorded on just one day on 27th August with newswires reporting the lack of intervention by the RBI amid market expectations of a sizeable amount of inflows related to IPOs, bond issuances and qualified institutional placements in the near term.”

“The ongoing flurry of IPOs with an upcoming one slated to be the biggest in India’s IPO history, as well as greater demand for IPOs in Asia outside China due to fears of wider regulatory crackdowns, is likely to result in more capital inflows. Capital flows could also come from rising demand for government bonds at the short-end of the curve in part due to market expectations of policy normalisation by the RBI still a long way off. In view of these inflows and US dollar weakness in Q4 in part due to a “buy-the-rumour, sell-the-fact” phenomenon after the expected QE tapering announcement, downward pressure on the rupee is expected to be modest.”

“Our view of a weaker rupee is premised on a widening current account deficit as the trade deficit expands modestly, with seasonal demand for gold due to auspicious days for weddings and festivals to push up non-oil imports.”