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An economic recovery is likely to be a drawn out affair, as cases spread across India’s states. However, decent inflows, yield premiums and further improvements in the external account will keep the INR stable in the near-term. Economists at ANZ Bank forecast USD/INR at 75.00 by year-end.

Key quotes

“India continues to grapple with the pandemic, which is now spreading. Various state governments have enacted lockdowns of their own, which has further dented consumer and business sentiment. An economic recovery is likely to be a long, drawn out and painful business.”

“A weaker USD and attractive yield premium is still keeping inflows coming in. Equity inflows have remained strong to the tune of $0.6 billion month-to-date. Debt outflows remain subdued despite a rating downgrade. In addition, the external position continues to get better. June recorded a merchandise trade surplus of $0.8 billion for the first time in 18 years. While subdued demand has kept imports suppressed, it nonetheless bodes well for the current account which already recorded a small surplus in Q4 FY20 (Jan-Mar quarter). We expect this balancing act to stay in place in the near-term, leading us to hold our forecast at 75.00 for end-2020.”