INR likely to remain susceptible to general election results, US-China trade talks and crude oil prices: Scotiabank

The Indian rupee is expected to remain susceptible to the general election results due on May 23, the US-China trade talks and crude oil prices. Further, in the near term, the USD/INR currency pair is likely to rise further towards the 72.0 resistance after the pair rallied through the 100-day moving average resistance on Monday, according to the latest research report from Scotiabank.

India’s CPI inflation rose to 2.92 percent in April from 2.86 percent a month ago, compared to market estimate of 2.99 percent. However, core CPI inflation eased to 4.55 percent y/y last month from 5.01 percent in March. In addition, the nation’s industrial production contracted 0.1 percent y/y in March, the lowest growth since June 2017.

"In our opinion, India’s benign inflation outlook could provide scope for the RBI to deliver a 25 basis points rate cut at the June 3-6 policy meeting. The INR FRA curve is now pricing in a 15 basis points rate cut within one month," the report added.

Moreover, the Fed is expected to cut the fed funds rate by 30 bps by the end of 2019, according to Fed Funds Futures prices. It has opened the door for interest rate cuts by some EM Asian central banks including the RBI.

The Election Commission is due to release the 2019 general election results on May 23. It could prop up the INR moderately as the BJP is likely to form a government coalition with existing National Democratic Alliance (NDA) allies.

Escalating US-China trade tensions have dented market sentiment, imposing depreciation pressure on the yuan. It is expected to keep weighing on the INR in the near term. China unveiled its retaliatory measures on Monday night, raising tariffs imposed on about USD60 billion of US goods with effect from June 1, 2019.

After the announcement, US President Donald Trump said he plans to meet his Chinese counterpart Xi Jinping at the G-20 Osaka Summit set for June 28-29. Crude Oil prices are likely to rally to some extent amid heightened military tensions in the Persian Gulf.

Meanwhile, Saudi Arabian energy minister said that the nation’s two oil tankers were attacked over the weekend near the Strait of Hormuz. According to our estimate, every $10 per barrel increase in oil prices could worsen India’s current account deficit by 0.5 percent of GDP as the nation is the world’s third largest oil consumer.