USD/INR pair likely to ease further

The USD/INR currency pair fell back 0.5 percent to 69.82 yesterday after reaching an all-time high of 70.16 last Friday. The Turkey crisis plus a larger than expected trade deficit in July saw it jump towards the 70.40 level and raised concerns of a repeat of the 2013 taper tantrum episode, noted Commerzbank in a research report.

In 2013, INR had lost more than 12 percent against the USD on the twin deficit fears, inflation that was close to 10 percent for 2012 and 2013 and an inept central bank. India’s macro scenario is now in a much better shape with growth likely to be at about 7 percent in 2018 and a more focused central bank that has helped to anchor inflationary expectations after introducing inflation targeting.

Yesterday, Fitch Ratings had stated that the sharp depreciation of rupee will have a limited effect on India’s sovereign rating in spite of expected pressures on the corporate and banking sectors. Fitch reaffirmed the BBB- rating with a stable outlook. It cited India’s solid external finances, particularly the low level of external debt.

As of the first quarter of this year, the central bank’s figures for short-term external debt on a residual maturing basis, remained at USD 222 billion or 42 percent of total external debt and 52 percent of FX reserves. These figures imply that the Indian rupee is less vulnerable compared to 2013 but at the same time, it should be in mind that India will not be immune to spikes in global volatility, stated Commerzbank. Given the relative calm, the USD/INR is expected to ease back further.