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The USD/INR currency pair is expected to find some reprieve from a stronger Chinese yuan, softer U.S. dollar and robust Q2 gross domestic product (GDP) report this week, according to the latest research report from Commerzbank.
The near record low for the Indian rupee (INR) continues to grab the headline attention. USD/INR managed to ease back slightly last Friday to 69.91. The softer USD tone and stabilization efforts from China could see it ease further today. However, the real headline grabber this week could be a blowout Q2 GDP report due this Friday.
It is expected to remain robust around 7.5-7.7 percent y/y following 7.7 in Q1. The low base last year due to the dual shocks of GST and demonetization could in fact see a blowout number of 8 percent or above. This is above the estimated potential growth pace of around 7 percent and could raise calls for RBI to stick to its hiking path.
"We are of the view that RBI is likely to hike at least one more time this year by 25 bps to 6.75 percent in the remaining two meetings this year after the 50bp so far this year. The main reason is due to elevated core inflation (excluding food and energy) which is running above 6 percent y/y for the past three months to July 2018," the report commented.
Even though RBI targets the headline CPI at 2-6 percent, the fact that core inflation is above this range should nudge them to be nervous, particularly given the supportive growth backdrop. Meanwhile, the positive growth outlook was also reinforced by Moody’s last week as it expects strong urban and rural demand and improved industrial activity to remain key growth drivers. The key risks to growth and the currency remain elevated energy prices.
