DBS economist Radhika Rao reports that USD/INR has eased towards the mid-94 handle as India’s balance of payments (BoP) improves and commodity prices fall. Near term, the Indian Rupee (INR) could benefit further from BoP-accretive flows, though Reserve Bank of India’s (RBI) forward book moderation and a firm US Dollar (USD) limit downside. Over time, DBS expects USD/INR to gradually resume an upward trend.

Rupee gains on flows and Oil correction

"USD/INR eased towards mid-94 handle, with further downside offset by a moderation in the RBI’s forward book (NDF maturities) and a firm dollar."

"In the near-term, rupee stands to gain further on BoP-accretive flows and lower commodity prices."

"Further ahead, we expect the authorities to resume absorbing incremental US dollar inflows to rebuild foreign exchange reserves, paving the way for a gradual resumption of upside in USD/INR."

"We have revised our rate call to an extended pause this year."

"Domestic bond yields were lower across the curve on a correction in oil prices and supportive RBI commentary in the past week."

"Rate hike expectations were also scaled back after dovish cues from the June MPC minutes were reinforced by recent comments from the RBI Governor where he downplayed the urgency to tighten policy levers, saying that rate hike talks were premature and any such intention would have been pre-empted by a shift to a tightening stance in June."

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