USD/INR: Rupee gains recorded in July are likely to be shortlived – MUFG

In it's Foreign Exchange Outlook report, analysts at MUFG Bank, see that recent gains of the Indian Rupee are likely to be temporary. They forecast USD/INR at 69.00 for the third quarter, and at 70.50 for the second quarter of next year. 

Key Quotes

“During July the Indian rupee strengthened against the US dollar in terms of London closing rates from 69.020 to 68.793. The Reserve Bank of India (RBI) is expected to cut the benchmark repo rate by 25bps to 5.50% on 7th August.”

“The Indian rupee’s gains against the dollar in July were chalked up during the first week of the month when the government revealed the Union Budget for FY19/20, but the rupee recorded losses thereafter. While immediate reaction to the Budget was positive, investor sentiment soon turned sour as the Budget also included a surcharge on the super-rich which is also applicable to foreign portfolio investors (FPI), sovereign wealth funds and alternate investment funds. Up to 40% of FPIs are liable to the surcharge. This is why FPIs offloaded USD1.7 bn worth of equities in July, making it the largest outflow since October 2018.”

“Rupee gains recorded in July are likely to be shortlived as FPIs continue to reduce its holdings of Indian assets. In addition, the dollar is expected to be supported from near term euro weakness as the ECB embarks on policy easing. Further, India’s real yield will continue to narrow with the RBI set to cut the benchmark repo rate by 25bps for the fourth consecutive time this year at its upcoming meeting on 7th August. As at June, India’s real yield has fallen to 2.57%, which is the lowest since July 2018.”