Indian rupee likely to prop up as further policy easing will prompt foreign investors to buy local bonds, says Scotiabank

Rising expectations of further monetary easing will prompt foreign investors to pour more funds into local bond markets, propping up the INR afterwards, according to the latest research report from Scotiabank.

India’s Finance Minister Nirmala Sitharaman reduced the fiscal deficit target to 3.3 percent of GDP in the Union Budget unveiled last Friday from an earlier estimate of 3.4 percent for FY2019-20, in a move that signals the government's commitment to fiscal consolidation.

RBI Governor Shaktikanta Das on Monday praised the government’s fiscal restraint, which raised the odds of a fourth consecutive rate cut in August in our opinion.

In addition, India’s summer monsoon rainfall has been increasing further, paving the way for the central bank to lower its policy rate again on August 7 to spur economic growth.

The proposed higher surcharge on super-rich has been weighing on local equities. P.C. Mody, Chairman of the Central Board of Direct Taxes (CBDT), said on Tuesday that India will clarify whether a tax surcharge aimed at the super-rich will apply to foreign portfolio investors (FPIs), but only if required. It will improve risk sentiment and boost local shares if FPIs are exempted from the tax increase.

"We maintain our short USD/INR position, while keeping a close eye on oil prices and awaiting the clarification on the higher tax issue. Technically, the pair will fluctuate gradually lower within the pennant. Meanwhile, the RBI replenishing its foreign currency stockpile will continue slowing the pace of appreciation in the high-yielding currency," the report further commented.