RBI policy announcement ;FX market implications

Standard Chartered notes :

• We expect a limited impact on USD-INR, as the RBI policy announcement was largely in line with market expectations. Interestingly, the policy highlighted the negative impact of INR real effective exchange rate (REER) gains on export margins.
  
  
• According to our estimates, the REER-36 measure is likely to increase another 0.9% in March. India's exports contracted 15% y/y in February. 
  
  
• While the decline was due partially to weak global demand and low commodity prices, the INR's trade-weighted overvaluation likely also played a role ('Indian importers - Buy USD-INR funded call spreads', 2 April 2015). 
  
  
• Separately, we think the proposal to permit Indian corporates to write covered options is a positive development that will likely improve market liquidity in the currency options markets while also encouraging further hedging of FX exposures.
  
  
• We expect USD-INR to trade higher from Q2-2015, owing to a combination of seasonal factors, positioning, risk reduction and continued intervention by the RBI to offset elevated INR REER levels. Our USD-INR forecasts for Q2-2015 and Q3-2015 are 64.50 and 63.75, respectively.