The Indian Rupee (INR) has remained stable since the beginning of the year. According to economists at Commerzbank, this stability will continue to be supported by strong growth and a hawkish Reserve Bank of India (RBI).
The RBI has been actively raising rates to combat inflation and maintain financial stability. In June, the RBI raised its benchmark interest rate for the first time since 2014, by 25 basis points to 6.25%. This was followed by another 25 basis point increase in August. The RBI has stated that it will continue to raise rates if inflationary pressures persist.
Commerzbank economists believe that the RBI’s hawkish stance will help support the INR, as it signals a commitment to keeping inflation under control. This, in turn, will help to maintain investor confidence in the Indian economy.
The Indian economy has been growing at a rapid pace, with GDP growth expected to reach 7.4% in 2018. This growth, along with a stable political environment, has helped to attract foreign investment into the country. The strong economic fundamentals of India will continue to support the INR, particularly when compared to other emerging market currencies.
Commerzbank economists also highlight the potential impact of a weaker US dollar (USD) on the INR. The USD has been under pressure due to ongoing trade tensions between the US and China, as well as concerns over rising US interest rates. A weaker USD would make Indian exports more competitive, which would be positive for the Indian economy and the INR.
However, the INR has been under pressure in recent months due to concerns over rising oil prices. India is heavily dependent on oil imports, and higher oil prices can lead to inflation and a wider current account deficit. Commerzbank economists believe that the impact of rising oil prices will be manageable, as long as they do not increase significantly above current levels.
Commerzbank forecasts a slightly lower USD/INR exchange rate of 81.50 by the end of the year, down from the current range of 80.50-82.50. This reflects the bank’s expectation of a stable to slightly lower USD, solid Indian growth, and the RBI’s commitment to raising rates to combat inflation.
Overall, the outlook for the INR remains positive, thanks to the strong economic fundamentals of India, a hawkish RBI, and the potential for a weaker USD. However, risks remain, particularly with regards to rising oil prices and global trade tensions. Investors should keep a close eye on these factors and adjust their portfolios accordingly.
