USD/INR likely to stabilize in near-term if RBI intervenes in forex market, mitigate pace of decline: Commerzbank

The USD/INR currency pair is expected to stabilize in the near-term if the Reserve Bank of India (RBI) decide to step up intervention efforts and at least mitigate the pace of decline, according to the latest research report from Commerzbank.

The Indian economy exceeded expectations in Q2 expanding 8.2 percent (consensus: 7.6 percent) from 7.7 percent in Q1. It was flattered in part by the lower base last year due to the dual shocks from demonetization and the GST introduction. The domestic demand was the main growth driver with private consumption rising 8.6 percent and government spending posting a firm 7.6 percent y/y.

The one disappointing aspect was softer investment spending which moderated to 10 percent after above 14 percent in Q1. The government is hoping for private investment to take over public spending in order to see a more sustainable growth picture. In any case, the robust pace of 8 percent in H1 is expected to slow in H2, the report added.

The Indian rupee (INR) is the worst performer vs USD this year among Asian currencies, down 10 percent. USD/INR rose another 0.4 percent last Friday to a new record high of just under 71.00 on month-end USD demand and elevated NYMEX oil prices holding around USD70. Net portfolio flows into the debt and equity markets in fact posted a net positive of USD534 million in August but this was not enough to save the INR.

"The question remains on what could slow INR’s drop despite the strong GDP report and net inflows? Apart from oil, it looks like RBI’s attitude towards INR will be a big factor," the report also commented.