Indian Rupee: Bearish bias with RBI support – DBS

DBS Bank’s Radhika Rao notes that onshore financial markets are under pressure from global developments, with foreign portfolio investors pulling out around $6.3bn and USD/INR trading back above 96.00. The Reserve Bank of India (RBI) has responded with FX intervention and liquidity draining tools, and DBS expects USD/INR to retain an upside bias this week while India’s 10-year yield stays above 7.0%.

INR under pressure, intervention tools

"Onshore financial markets are feeling the heat from global developments, with FPIs withdrawing ~$6.3bn from the debt and equity markets in Sep-Oct26, pushing USD/INR back above 96.00."

"While the FX intervention response has been strong, the central bank will prefer to time dollar sales to rationalise the use of the reserves buffer and prevent widening the ballooned short FX forward book."

"Meanwhile, surplus in the banking liquidity attracted two overnight VRRR auctions on Monday, helping to absorb INR 2.1trn, while OMOs and sell/buy swaps are the other preferred tools."

"As such, the RBI's inflation mandate has reinforced the push to drain excess liquidity and align the overnight rates to the repo to allow for effective monetary transmission."

"With euro jitters feeding into the dollar index, we expect USD/INR to stay biased for upside this week, while 10Y yield holds above 7.0%."

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