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The USD/INR currency pair is expected to test this year’s low of around 69.20 upon entering a seasonally strong period in which further gains are also possible, according to the latest research report from Commerzbank.
Further, the Reserve Bank of India (RBI) is also expected to step up intervention efforts to mitigate INR’s strength and at the same time build up the country’s FX reserves.
February inflation ticked up a bit more than expected to 2.6 percent y/y from 2 percent in January. This was mainly due to the smaller contraction in food prices which came in at -0.7 percent y/y from -2.2 percent previously.
Excluding food and energy items, core inflation remained firm at 5.3 percent y/y from 5.4 percent previously. However, this is unlikely to deter the central bank’s bias to provide more monetary stimulus to the economy to support growth.
The fact is that headline inflation is still below RBI’s long-term 4 percent target and at the lower end of the 2-6 percent target range. In the previous meeting on February 7, RBI surprised by cutting rates by 25bp to 6.25 percent and shifted to a neutral stance from “calibrated tightening” previously.
However, since August 2018, inflation has held below the key 4 percent level. For the rupee, it continued to strengthen yesterday on strong net inflows with USD/INR closing below the 70.00 level for the 2nd consecutive session around 69.71. This has seen INR reverse all of this year’s losses and is up 0.1 percent year-to-date.
"RBI’s near term focus is likely to remain on supporting growth and not inflation. As such, we are still inclined to look for a follow rate cut at the next meeting on April 4 by 25bp to 6 percent. This will effectively reverse the 50bp rate hike in H1 2018 when RBI hiked in response to upside risks to inflation," Commerzbank further commented.
