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Informist, Thursday, Aug 8, 2024

MUMBAI – The Indian rupee is unlikely to weaken sharply against the US dollar as the global economy will have a "soft-ish" landing and the Japanese yen carry trades are likely to be unwound at a more modest pace, MUFG Bank said in a research note today. A strong and stable domestic economy and the expected inflow of foreign funds into India will help the rupee, the bank said. The Reserve Bank of India is also expected to continue to intervene strongly in the foreign exchange market to keep the rupee from falling sharply, the report said.

"While the USD/INR has admittedly moved against our existing forecast set, we are not bearish on the Indian Rupee," the MUFG note said. 

However, the rupee is expected to weaken modestly in the next one to three months due to uncertainty about the extent of the carry trade unwinding that is yet to happen, MUFG said. The bank forecasts the rupee will fall to 83.50 per dollar in the current quarter of the calendar year. Today, the rupee closed at 83.9625 to a dollar, its third consecutive lowest close this month. MUFG expects the rupee to then strengthen to 83.20 a dollar in the last quarter of 2024. For 2025, it expects the rupee to trade around 82.8 in the first quarter, around 83.00 in the second quarter, and then around 83.20 in the third quarter.

The bank noted the rupee has fallen close to 84 a dollar and said it would have fallen further had it not been for the aggressive intervention by the RBI. The bank also noted the dollar has moved up against the rupee while weakening against other currencies, and that it has underperformed against low-yielding Asian currencies such as the Japanese yen, the Malaysian ringgit, and the Thai baht. The bank said the rupee has been hit by the unwinding of the global carry trade, the hawkish stance of the Bank of Japan, and weak data from the US.

Apart from foreign investment inflows arising from the inclusion of Indian government bonds in global indices and an expected improvement in foreign direct investment, a strong pipeline of equity initial public offerings will also help the rupee, MUFG said.

After the inclusion of Indian bonds in the JP Morgan Government Bond Index-Emerging Markets, India has continued to receive steady inflows of around $2 bln per month, the report said.

Additionally, any sustained decline in international crude oil prices will mean a lower current account deficit than the bank is currently forecasting, MUFG said. The current account deficit is likely to be closer to 1% of gross domestic product if global oil prices stay low, the bank said, as compared to its earlier estimate of this deficit being 1.4% of GDP. Due to these factors, the bank expects the rupee to strengthen over the next 6-12 months.

The bank did note India's oil trade deficit has been running at a larger pace of $11 bln-$13 bln than implied by the historical relationship with global oil prices but added it expects this divergence to close eventually. MUFG said the recent cut in import duty on gold may have led to a higher import pressure on gold but said it was not clear about the net impact of the policy on the country's trade deficit.

"In particular, seasonality for India's combined goods and services trade balance turns much more helpful from December, and especially in February and March," MUFG said in the report.

The bank said the rupee has weakened historically during global or domestic crises and added it does not forecast any global shocks and noted the domestic economy is still strong.  End

US$1 = 83.96 rupees

Reported by Gowri Lakshmi

Edited by Aditya Sakorkar

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