USD/INR: Outlook for the Indian rupee remains weak – MUFG

Analysts at MUFG Bank, forecast USD/INR will trade around 72.50 during the first quarter, in the 70.00-76.00 range and reach 73.00 during the third quarter. 

Key Quotes:

“For the first two and a half weeks of February the Indian rupee was relatively immune to risk aversion driven by COVID-19, helped in part by portfolio inflows into both equities and bonds. Demand for Indian assets rose as the government moved to abolish the distribution tax on dividends, and on the back of two ECB-style long-term refinancing operations (LTRO) conducted by the RBI on 17th and 24th February.”

“Risk aversion eventually caught up with the rupee as the COVID-19 outbreak worsened outside China. The Indian economy is likely to be one of the more insulated from the impact versus other Asian economies, but the rupee would still be susceptible to capital outflows triggered by risk aversion. India’s pharmaceutical industry is likely to take a hit, given that 70% of raw materials for drugs are imported from China. Structural factors, particularly problems in the financial sector, continue to pose greater downside risks for the economy. But the scope for further easing is limited in first half of the year due to elevated inflation at 7.59% y/y in January. This is why the RBI is now resorting to ECB-style LTROs by offering 1Y and 3Y term repos in a bid to lower rates at the short-end. This helped flatten the yield curve.”