USD/INR: Risk tilted towards the downside for the Indian rupee –  MUFG

Analysts at MUFG Bank, see the USD/INR pair trading in the range 72.000 – 79.000 range during the third quarter. They consider that the net inflows into Indian equities were unlikely to last.

Key Quotes 

“The Indian rupee was the worst performing Asia ex-Japan currency against the dollar in June, advancing only very slightly. The rupee’s flattish profile came amid rising levels of foreign reserves to new record highs in June. Foreign portfolio investments into India equities increased by 60% in June from May’s USD1.7bn, and net outflows from Indian government bonds (IGB) tapered by 87% from May’s -USD2.7bn.”

“Risks remain tilted towards the downside for the rupee as the dollar gains momentum on mounting second wave COVID-19 fears. This is one of the reasons why net inflows into Indian equities are likely to reverse, while foreign investors are likely to continue to offload IGBs. This is not to mention the fact that 37 out of 50 Nifty companies that reported Q1 earnings recorded deep y/y decline in profits, and a sharper contraction is expected in Q2.”

“With India still struggling with containing COVID-19, economic activity is likely to remain crimped. Average daily COVID-19 cases in India were 2.5 times more in June than in May. Narrowing trade deficits can help defray rupee losses, driven mainly by the sharper de