USD/INR likely to consolidate around 67.0, with increasing upward risks due to ECB’s tapering talk and bouncing 10-year UST yield: Scotiabank

The USD/INR currency pair is expected to consolidate around the 67.0 mark for now, although with increasing upward risks due to the European Central Bank’s (ECB) tapering talk and bouncing of the 10-year United States’ Treasury yield, according to the latest research report from Scotiabank.

The Reserve Bank of India (RBI) on Wednesday released its second bi-monthly monetary policy statement of FY2018-19, aimed at "achieving the medium-term target for CPI inflation of 4 percent±2 percent (on a durable basis) while supporting growth".

The central bank also revised its inflation forecasts. With the HRA impact included, India’s CPI inflation was projected at 4.8-4.9 percent in the first half of FY2018-19 and 4.7 percent in the second one with risks tilted to the upside, compared to 4.7-5.1 percent in H1 and 4.4 percent in H2 estimated on 5 April.

Also, the RBI retained its GDP growth assessment at 7.4 percent for FY2018-19 as in the April policy statement, with risks evenly balanced. The central bank remains concerned over a significant rise in households’ inflation expectations in the May 2018 round of the RBI’s survey.

"In our opinion, further monetary tightening will be delivered by the RBI with caution if India’s CPI and core CPI inflation remain elevated and accelerate going forward. Leveraged funds have scaled down their net long crude oil futures positions according to the latest CFTC data, which could ease inflationary pressure from oil prices and alleviate concerns over the nation’s current account deficit to some extent," the report added.

Meanwhile, given India’s strong economic growth, a 25 basis points rate hike from the RBI could prop up the INR moderately. However, higher funding costs will slow the nation’s economic growth and then weigh on the INR finally in the medium term.

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