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Analysts at MUFG Bank, see the USD/INR pair trading in the 68.00/76.00 range during the first quarter. They forecast the pair at 72.75 but the second quarter and at 73.50 by the fourth quarter. 

Key Quotes:

“Indian rupee weakness in January was mainly driven by risk aversion stemming from the coronavirus outbreak, which accelerated after US-Iran tensions ebbed. With the spread of the coronavirus weighing on risk sentiment in the coming months, it would impinge the rupee. This is on top of other domestic factors which are potentially rupee negative such as fiscal slippage, slow growth, ongoing financial sector problems and negative real yields. In favour of boosting the ailing economy, the government has allowed fiscal slippage, with FY19/20’s fiscal deficit up by 50bps to 3.8% of GDP, and FY20/21’s target was revised much higher from 3.0% set out in its long term plan to 3.5%.”

“Real yields have already turned negative since November 2019. The acceleration in headline CPI to 7.35% y/y in December pushed real yields deeper into negative territory. India is currently the only country within the ASEAN+India region to have a negative real yield. We doubt that the move to raise the foreign portfolio investor short-term debt limit to 30% from 20% would help stave those outflows in the coming months during this period of risk aversion.”

“In view of the recent spike in inflation, the RBI is unlikely to cut rates again at the upcoming meeting on 6th February. Operation twists, conducted by buying long term bonds and selling short term bonds of the same amount in a bid to lower interest rates at the long end, may be the more probable policy move.”