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Economists at ANZ Bank expect 2021 to be a repeat of 2020 for the Indian rupee. A solid external position will be capped by the central bank’s push for a competitive CNY/INR cross.

Key quotes

“Premised on a pick-up in activity after various lockdowns, we now expect India’s GDP growth to contract at a less severe 7% in FY21 (fiscal year ending March 2021). Case numbers have stabilised and the real economy is gradually coming back to normalcy, as indicated by a host of high frequency data.”

“Given our expectations that inflation will begin to subside in the coming months and the output gap will remain wide till end of 2021, we expect more rate action by the Reserve Bank of India (RBI). A cumulative 50bps worth of cuts is likely in 2021.”

“Portfolio flows will turn more solid due to positive yield differentials and stronger growth next year. In addition, FDI flows are expected to be robust on many M&A deals. The trade numbers could see some correction as imports rise but a clear demand pull is still missing. That should help cushion the current account deficit in FY22.” 

“The RBI will likely continue to bat for a more competitive currency, especially vis-à-vis the CNY. As consistent FX intervention has associated costs, we believe mild appreciation is likely for the rupee, to 72.00 by end-2021. Broad USD weakness will also aid our forecasts. Beyond that, we expect the rupee to move closer to its fair value at 73.5 in 2022.”