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Analysts at MUFG Bank, see the USD/INR pair rising to 74.500 during the current quarter and to reach 74.750 in the first quarter of next year. They explain that low rates and higher inflation in India, is keeping real yields in negative territory. 

Key Quotes:

“Strong merger and acquisition flows, and investor optimism on record current account surplus data buoyed the Indian rupee at the beginning of October. But rupee gains eroded by month-end as market volatility increased ahead of the 3rd November US presidential elections, and the RBI’s new forward guidance signalled rates to be kept lower for longer. In October, total COVID-19 cases were lower than the preceding month for the first time since the start of the pandemic. However, we see risks of India taking a much longer time period to get back to pre-pandemic levels in nominal GDP terms versus most Asia ex-Japan economies. This would warrant a longer period of policy accommodation by the RBI.”

“Elevated levels of inflation largely on supply constraints in Q4 would push out the timing of the next rate cut to Q1 2021 instead. In the interim, the RBI is likely to ramp up operation twists and open market operations to keep a lid on bond yields due to a flush in supply.”

“The year-ahead prognosis for the rupee remains tilted towards the downside, though losses would be dampened by a weaker dollar profile, and a well-contained trade deficit on benign oil prices and slow recovery in consumer demand.”