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Prakash Sakpal, Economist at ING, suggests that the USD/INR is firmly on track to meet ING’s 73.50 forecast for end-2018 as ongoing financial trouble comes as a fresh blow to the rupee.

Key Quotes

“As if India’s weakening external payments and budget situation aren’t enough, reports of trouble at a non-bank finance company, a housing company, and a couple of private sector banks come as a fresh blow for the Indian rupee (INR). Recent developments have regulators, including the central bank (RBI), on their toes.”

“The financial problems of a major infrastructure company don’t come without political implications for the current administration. This could put Prime Minister Modi’s infrastructure-boosting policies on the back burner, a setback to his bid for a second term at general elections in early 2019.”

“These troubles also complicate RBI policymaking ahead of the next bi-monthly meeting in early October when another policy interest rate hike is looming large.”

“We believe the INR is in for continued losses ahead. We are sceptical that the RBI will raise rates by more than 25 basis points at the next meeting given that inflation is, at least for now, running below the 4% mid-point of the central bank’s target.”

“This will be just enough to make up for the rate gap to be opened by the US Federal Reserve’s 25 basis point hike expected later this week, nothing more. If so, then three Fed rate hikes this year will be merely matched by the RBI, without giving the INR any interest edge to gain against the USD.”