INR outlook: On a stronger footing
- We expect INR to trade in a range of 60-62 during FY2015.
- Compression in current account deficit (CAD) and accretion to foreign exchange reserves amid policy induced capital inflows helped reduce the external sector vulnerability.
- The key risk to the outlook is the outcome of the general election in May’2014 and shift in Fed’s monetary policy stance from gradual to aggressive tapering
The Indian Rupee has witnessed remarkable stability in the recent weeks, trading in the range of 60 - 62. The extreme volatility in INR has reduced considerably over the last few months. Our analysis suggests that realized volatility for USDINR cross has fallen by around 80% compared to the peak
volatility in September 2013. In the immediate near term the upcoming general elections are likely to in crease volatility in the Rupee.
Federal Reserve errs on the side of caution
In the recent FOMC policy meeting, Fed offset its dovish stance of removing the unemployment rate target of 6.5% as an anchor for interest rate increases by hawkish expectation of a higher policy rate of 1.0% by end-2015 (vs. 0.75% prior).Though we believe that US interest rates are likely to go higher in the medium term, the movement is likely to be gradual.Consensus expects US Treasury 10 year yield at 3.34% by Q4 2014 vs.
2.74% presently. Amid this gradual move in US rates, we believe that risk assets are likely to remain supported and the contagion from higher US rates to depreciation pressure on EM
currency (including INR) has reduced considerably.
Reduction in external sector vulnerability aided capital inflows
Sharp compression in current account deficit (CAD) led by lower gold and other imports and accretion to foreign exchange reserves amid robust capital inflows helped in improving th
e medium term dynamics for India.The reduced external sector vulnerabil ity has aided capital flows to India.Net FII flows have turned positive in Jan-March 2014 with an inflow of USD
8.4 bn vs. an outflow of USD 5.3 bn in April-December 2013.
Outlook: Rupee to trade within a range of 60-62 for FY2015
We continue to believe that INR will trade in the range of 60-62 through the course of FY2015, though intermittent spikes beyond the range cannot be ruled out. Formation of a stable government will bouy capital flows thereby aiding appreciation pressure on the Rupee. However we believe that the
Central Bank is unlikely to allow for very sharp appreciation in Rupee.