USD/INR to move towards 73 as RBI tolerates some rupee appreciation – ANZ

Economists at ANZ Bank expect modest appreciation pressure to continue guiding the rupee to 73.0 versus the USD by the end of March 2021. RBI’s strong FX intervention is the only major hindrance to material INR appreciation.

Key quotes

“The Indian rupee has traded almost flat month-to-date, but gains have been more robust quarter-to-date (~2.6%). We believe that is largely due to a substantial improvement in the external position. The current account balance is expected to record a sharp surplus in Q2 2020, which is expected to extend into Q3. The BoP position should record a sizeable surplus this year. In addition, FDI flows are robust and portfolio flows have also turned more supportive recently. Overall portfolio flows remain positive, month to date, thanks to decent debt inflows.”

“Countervailing the improvement in the external position is the RBI’s consistent FX intervention that has resulted in FX reserves rising to USD545 B (ending 18 Sep) from under USD500 B in the end of May. Continuing with the same pace of accumulation will be difficult given the surplus liquidity in the financial system. Therefore, a slightly faster pace of appreciation is likely to be tolerated, in our view. We, therefore, expect USD/INR to move towards 73.0 by end FY21.”