DBS Group Research’s Radhika Rao highlights renewed weakness in the Indian Rupee (INR), with USD/INR moving back toward the 95.00 handle on persistent foreign portfolio outflows and an unfavourable global risk backdrop. She flags potential fuel price hikes with Brent above $100, El Nino-related inflation risks, and expectations that benchmark bond yields will stay bid as markets price fiscal and tightening concerns.

Rupee pressured by flows and inflation risks

"INR asset markets are still beholden to global developments, especially absence of concrete progress in the US-Iran negotiations and delay in reopening of the SOH [Strait of Hormuz]."

"Beyond the election results, markets eye the likelihood of an increase in the domestic retail fuel prices, as Brent prices stay stubbornly above $100bl."

"USD/INR was back up towards the 95 handle this week, on the back of persistent foreign portfolio outflows from the equity market (-$5bn this FY and -$0.7bn from debt) and we expect further upside given the unfavourable risk backdrop."

"Press reports cited ongoing discussions within the central bank to boost FX buffers and draw inflows, including a facility to attract non-resident inflows and removal of withholding tax on offshore bond investors."

"Benchmark bond yields are also expected to stay bid as markets price in tightening moves and risks to the fiscal outlook on account of higher subsidies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)