FxWirePro: INR to stay FX outperformer among BRICS and other EMs

Despite that fact that the growing concerns over whether next recession is underway or not, Chinese growth has slowed and rising market risk aversion, we foresee INR as less vulnerable to China's slowdown due to relatively lower trade dependence compared with other EM economies and improving policy measures both by central bank and the PM Modi's government. While currencies of other emerging economies like BRL, CNY extending their loses.

In this respect, the INR has fallen about 2.4% since the RMB devaluation on August 11, less than most other Asian currencies. However, with most EM currencies having depreciated sharply against the USD over the past year, we think the RBI will remain mindful of REER strength.

We expect the INR to remain an EM FX outperformer. With a Fed liftoff drawing closer, our relatively positive view on the INR is predicated on a substantial decline in India's external vulnerabilities, ongoing structural reforms and more orthodox central banking, inspiring improved investor confidence. The continued fall in commodity prices is bringing about improvements in India's current account, fiscal balance and inflation.

RBI's decision last week added further supports to INR outperformance view - unexpected decision by the governor to set the limits for FPI investment for debt securities investment in rupee terms opens the door for more portfolio inflows, which is a positive factor for the INR when global equity markets are weak. The flows impact will, however, be gradual, as the limits are set to be raised in phases over October 2015 to March 2018. Similarly, we think the approval for corporate issuance of offshore INR bonds is another positive factor for the currency.

As such, we do not expect the RBI to stand in the way of any further gradual depreciation of the INR, especially if global market risk sentiment remains negative and other Asian currencies continue to decline as we expect. While the RBI says it is monitoring the pass-through of the recent INR depreciation on inflation, the bank also noted the offsetting impact of benign crude prices. We think these comments suggest that the RBI is not overly concerned with INR weakness.