INR likely to modestly appreciate amid hopes of rise in India’s foreign reserves, says Scotiabank

The Indian rupee is expected to appreciate modestly as India’s foreign reserves are expected to continue increasing amid further portfolio and repatriation inflows but at a slower pace, according to the latest research report from Scotiabank.

India’s CPI inflation rose further to a near six-year high of 7.59 percent y/y in January from 7.35 percent a month ago, with food prices surging 13.63 percent y/y that eased slightly from December’s 14.19 percent. Meanwhile, the nation’s factory output contracted 0.3 percent y/y in December after growing 1.8 percent in November, missing market estimate of a 1.7 percent increase.

Rising retail inflation and shrinking industrial production justified the RBI’s latest decision that left its policy rate unchanged at 5.15 percent on February 6 but continued with the accommodative stance. The RBI is still expected to lower its benchmark interest rate in April or June on expectations for cooling food price inflation.

In addition, the Indian central bank needs to improve the transmission mechanism as the country’s bank lending growth slowed to 7.2 percent in January from 14.8 percent the same period a year ago. A weak credit supply growth casts a shadow on the nation’s economic growth, the report added.

Foreign investors are expected to pour more funds into India’s equity and bond markets as the RBI is set to inject as much as INR1 trillion cash through LTROs. The Indian central bank has announced that it will hold a 3-year repo auction for INR250 billion on February 17 and a 1-year repo for the same amount on February 24.

Apart from that, an RBI article said India Inc has significantly increased raising capital through External Commercial Borrowings (ECB) in the first half of FY2019-20, with total loans surging 55 percent y/y to INR618.33 billion.

Refinitiv data also showed Indian firms have issued a record USD5.6 billion worth of dollar bonds between January 1 and February 11, following a record gross issuance of USD16.5 billion in 2019. US President Donald Trump will travel to India on February 24-25 to meet Indian Prime Minister Narendra Modi and may sign a bilateral trade deal with India during his trip.

Earlier on February 4, the Trump administration said in a new regulation that it will allow companies to pursue tariffs against foreign competitors if they can show those rivals have benefited from currency manipulation in their countries.

According to the regulation, American companies will be able to pursue such tariffs as soon as April 6. Last but not least, a risk-friendly mood will likely sustain and prop up EM Asian currencies going forward, with the Covid-19 outbreak showing early signs of stabilization and improvement in China, Scotiabank further noted in the report.

In addition, Dr Zhong Nanshan, an 83-year-old Chinese epidemiologist who won fame for combating the SARS epidemic in 2003, told Reuters on Tuesday that the coronavirus outbreak should hit a peak in middle or late February followed by a plateau and decrease, and may be over by April.