INR likely to strengthen in H2 2016, but end of 2013 emergency measures may add to volatility

In April, the RBI lowered its key policy rate to 6.5%, a five-year low; however, it is unlikely to lower rates further. Moreover, a new liquidity management framework was introduced by the RBI to underpin the monetary policy transmission. In 2016, the Indian rupee depreciated against the US dollar from its highest level this year; however, relative interest rate and growth differentials continue to be strong in its favour, noted Lloyds Bank.

Wider investor confidence for emerging market currencies is likely to be the swing factor that continues to be weak, according to Lloyds Bank. Rupee is likely to be vulnerable to the pace of US rate hikes. INR is likely to get stronger in H2 2016, though the RBI is expected to interfere to contain the appreciation, noted Lloyds Bank.

“The expiry of emergency measures introduced in 2013 to prop up the flagging currency could add to volatility in H2 2016”, said Lloyds Bank.