USD/INR likely to trade lower when external uncertainty fades away, says Scotiabank

The USD/INR currency pair is expected to trade lower when external uncertainty fades away as a full-blown war is in no one’s interest, neither the US nor Iran, according to the latest research report from Scotiabank.

Escalating US-Iran tensions are denting risk sentiment and weighing on the INR at the moment. Meanwhile, the INR remains susceptible to surging oil prices as crude oil imports account for 27 percent of India’s total imports in the first 11 months of 2019.

The INR tumbled in the past sessions. However, the RBI is expected to step in to smooth out excessive moves in the INR exchange rate with its massive foreign currency stockpile that rose to USD457.47 billion in the week ended December 27 from USD454.95 billion a week ago, the report added.

In addition, we believe the central bank will maintain its pro-growth stance to boost credit supply and revive growth in the Asia’s third-largest economy, together with the FY2020-21 Union Budget due to be released on February 1.

The Indian regulators need to improve the monetary policy transmission mechanism as corporate bond yields do not fall by the same amount as that of government bonds after three rounds of Operation Twist auctioned on December 23, December 30 and January 6 respectively.

Meanwhile, the Fed’s dovish stance and the phase-one trade deal reached between the US and China have created an environment for risk-taking this year, at least in the first half, Scotiabank further noted in the report.