USD/INR: Rupee set to weaken again in May – ANZ

Having depreciated 2.2% since the last monetary policy announcement on 7 April, the Indian rupee has relinquished its status of the best performing regional currency hitherto this year. The road ahead for the rupee has become more complicated. Negative real interest rates, potential GDP and earnings downgrades and a moderately weaker external position have become headwinds for the currency. But most of all, the absence of a strong policy response when there is capacity to do so, is what worries economists at ANZ Bank the most.

Policy action is vital  

“The INR could continue to weaken in the absence of a strong anchor from the central bank. The still strong BoP position of around $50 B expected in this fiscal year as well as an outstanding forward position of $44 B in the 3-12 month bucket provide abundant capacity to the RBI to defend the INR. Nonetheless, the RBI needs to deploy this capability in a timely manner.”

“Lastly for the immediate term, we cannot ignore the seasonality factor. Another factor is stacking up against the Rupee and is set to worsen its price action in the near-term: the currency’s weak seasonality in May, broadly spilling over to Q2. INR has weakened in 17 out of the last 21 years, vis-à-vis the USD, with an average spot loss of 1.1%. In fact, the weakness is broad-based, with the Rupee outperforming only the Malaysian ringgit among the major currencies in the month. The frequency of under-performance is also close or higher to 50% for most pairs in this period.”  

“A strong wedding season and subsequent gold imports have stood out as main reasons for this seasonality trend in the month of May and Q2. We could be in for a weak May for INR this year if the recent surge in gold imports persists for longer.”