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Analysts at MUFG Bank, point out that the recent gains seen in the Indian rupee were limited despite weaker dollar and record equity inflows. They forecast USD/INR at 74.00 by the end of the fourth quarter and at 74.500 by the end of the second quarter. 

Key Quotes:

“The magnitude of the Indian rupee’s gains in November was the least amongst other Asia ex-Japan currencies despite a host of factors that could have pushed it much higher. The dollar weakened following the US presidential election confirming the end of the Trump presidency and positive COVID-19 vaccine news. These developments also helped lift Indian equities, with net foreign portfolio investments at a record high of USD8.3bn in November.”

“Our view of a weaker rupee in the year ahead has not changed. Near-term downside risks for the rupee stem from the unwinding of elevated dollar short positions. In addition, the RBI has started to monetise state government debt while ramping up operation twists and open market operations.”

“We do not expect the RBI to cut rates on 4th December as headline inflation remains elevated at 7.61% y/y. In order to boost the economy, the government announced its third fiscal package amounting INR9trn (4.0% of GDP).”