USD/INR likely to trade in 64-65 range in the near-term, says Scotiabank

The USD/INR currency pair is expected to trade in a range of 64-65 in the near term; an excessive strength of the INR is not favourable as it could weigh on India’s export competitiveness, even though India is not an export-driven economy. It comes as no surprise that rising foreign currency stockpile has slowed the pace of appreciation in the INR, Scotiabank reported.

India has typically financed its persistent current account deficit (CAD) with financial account surplus consisting of net FDI and net portfolio investment. As India’s imports of oil and gold account for about one-third of total imports, global crude oil prices and RBI’s real policy rate that partly drives domestic demand for inflation-resistant gold are critical to the nation’s trade deficit and current account deficit.

The nation’s exports advanced 15.6 percent in the January-May period this year after contracting 17.0 and 1.5 percent in 2015 and 2016 respectively, helping boost India’s economic expansion. In real terms, the contribution from exports and government consumption came in at 2.0 and 2.4 percentage points respectively in the March quarter when India’s economy expanded 6.1 percent y/y.

"However, a 32 percent y/y real growth in government consumption is not sustainable in our view. The government will need to shore up private consumption and exports to regain the crown of the fastest growing major economy in the world," the report said.