Losing close to 0.75% against the buck since last week, the indian rupee is facing further difficulties. The latest policy minutes of the Reserve Bank of India (RBI) provide a good insight of where monetary policy is heading while risks over oil and food prices make committee members worried.
The dovish-biased RBI second rate cut in April does not appear as a major breakthrough, although uncertainties on political stage as well as rising oil prices and potential oil supply shortages should rather favour a wait-and-see approach. Furthermore, the RBI is expected to inject further long-term liquidity worth $5 billion in the form of USD/INR buy-sell currency swap, the second similar operation in a month, a move that should accelerate rupee’s depreciation.
It is therefore to question whether the INR will remain within the 69 range or whether it should go back towards February 2018 levels of 64. Indeed, although oil prices below $80 are not expected to disrupt consumer prices directly, the removal by the US of Iran oil waivers could weigh on the Indian economy. Iran is the third supplier of the country (11% of total supply) and Iran’s second largest buyer.
Hence, considering current circumstances it seems reasonable to say that INR vulnerability is there to stay. The dovish-bias adopted by the majority of RBI members, the outlook of another rate cut of 25 bps in June 2019 and risks over oil supply should have a negative impact on the indian rupee.
Currently trading at 69.72, USD/INR is heading along 69.86 short-term.
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By Vincent Mivelaz