Indian rupee trims gains on real terms

The Indian rupee trimmed gains on real terms in 3Q15, which was mainly due to a correction in the major currencies. Paring down of US Fed hike expectations saw the US dollar take a breather. On the other hand, marginally positive growth indicators led the euro and yen to rebound off lows. This saw the INR trim gains on real terms to 10% by Sep15 from a high of 14.5% in Mar15 since the start of last year. 

While it is unclear if this pullback will sustain, it eased concerns over trade competitiveness. The worry was that rupee's relative strength against its trading partners could further pressure the external sector and hurt the government's push to revive the domestic manufacturing sector. Exports have contracted an average -17% YoY so far in this fiscal year. 

The US FOMC in October however renewed expectations for a rate hike in December. This helped the dollar to get off its back, while the ECB's dovish overtures saw the euro pull south. These moves reaffirmed that monetary divergences are still at play. The Currency economist expects USDINR to end the year at 66.50 and continue to drift higher into 2016. The authorities are likely to keep a close eye on the exchange rate movements, especially to counterbalance its gains on real terms. Intervention trends point to official presence on both sides of trade, i.e. build reserves during bouts of rupee strength and deploy the buffers to keep excessive weakness in check when global volatility heightens