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USD/INR likely to fluctuate around 64.00 for some time; 2018 state elections to intensify local market volatility

The Indian rupee is seen to hover at around 64.00 vs the US dollar for quite some time now, while the upcoming year, burdened with a wide array of state elections, will likely intensify local market volatility from time to time. The high-yielding INR has remained resilient with a month-to-date gain of 0.6 percent despite equity outflows, which could be partly attributed to a flat DXY Index.

A number of events in relation to the INR occurred this year:

  1. India’s CPI inflation could accelerate further in December after rising to 4.88 percent y/y in November.
  2. The RBI left its policy rate and CRR unchanged at 6.00 percent and 4.00 percent respectively on December 6 with a neutral stance to strike a balance between bolstering the nation’s economic growth and securing the retail inflation target of 4 percent ± 2 percent on a durable basis.

In the meantime, the Bhartiya Janata Party has secured victory in the Gujarat elections but lost a significant number of seats in rural areas, which has raised fears among some market participants that the government may not continue with structural reforms over the period of time.

Meanwhile, the INR is due to witness the Union Budget 2018 on February 1 that will be the first post-GST budget and the last one of the National Democratic Alliance (NDA) government before the 2019 Lok Sabha election. It will indicate if the government is getting into a populist mode and sticks to the existing fiscal consolidation roadmap and also paint the future pathway for the domestic currency.

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