Indian Rupee: RBI measures support near term – MUFG

MUFG’s Michael Wan analyses recent Reserve Bank of India actions and their impact on the Indian Rupee. He notes that RBI’s new FX and liquidity measures have sharply strengthened spot USD/INR, but also pushed stress into forwards, offshore NDFs and bonds. Wan highlights India’s structural capital inflow imbalance and forecasts USD/INR gradually rising to 97.50 by the September quarter next year.

RBI tools shift pressure across markets

"The key driver for the INR move was yet another round of FX measures by the RBI to curb weakness in the Indian Rupee announced over the weekend."

"The 20% Foreign Exchange Risk Reserve charge on FX derivatives to hedge current account exposures in particular is somewhat akin to similar measures undertaken by China in the past to manage the pace of RMB depreciation."

"Overall, while spot USD/INR went down sharply, the pressure showed up in other areas of the market, including some rise in onshore forward premias reflecting some incorporation of the 20% charge amidst likely lower liquidity, wider INR NDF offshore spreads reflecting a shift in hedging demand and positioning adjustments near-term, coupled with higher INR bond yields with the 10-year rising closer to 7.4% now."

"We are forecasting USD/INR to gradually rise higher to 97.50 by the September quarter next year, with RBI likely to take more measures if INR were to weaken further from here."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)