Indian rupee likely to depreciate gradually before FOMC’s June meeting

Recently, foreign investors reduced their holdings in Indian bonds as the Reserve Bank of India is expected to keep policy on hold in June due to the slight acceleration of retail and wholesale inflation in April. Moreover, the Indian rupee will continue to be vulnerable to rising expectations of a rate hike by the US Fed.

Slowdown of carry-trade might soften the high-yielding INR, said Scotiabank in a research report. Outflows of capital will also result in reduction in India’s foreign reserves as the RBI might have to sell foreign currencies to smoothen FX vols, added Scotiabank. The Indian rupee is expected to gradually decline before FOMC’s June meeting.

Also, the uncertainty regarding the reappointment of RBI Governor Raghuram Rajan might harm the confidence of foreign investors. The rupee is expected to be negatively impacted if Rajan is not reappointed as the Governor in August, according to Scotiabank.

Meanwhile, India’s inflation rose slightly in April. Its medium-term outlook is likely to remain benign on the high probability of an above-normal monsoon rainfall in 2016. This will give leeway to the RBI to lower policy rate in August.