USD/INR: We would caution against turning too positive on the Rupee - Commerzbank

Analysts at Commerzbank, point out that the Indian rupee is weaker again on firmer oil prices and add that the new RBI governor indicated that he will meet some of the government's demands, creating uncertainty on how this will turn out regarding the central bank’s political stance.

Key Quotes: 

“The Indian rupee rose sharply by nearly 4% vs USD in Q4 2018 thanks to the near 40% plunge in oil prices. USD-INR managed to close below the 70 mark by end-2018 although INR still fell by 8.5% vs USD in 2018. The sharp correction in oil prices eased concerns over the current account deficit and the fiscal deficit which in turn helped to shore up investor confidence.”

“In early 2019, USD-INR has popped back above the 70 market towards the 71.00 level, down nearly 2% vs USD due to the recent rebound in oil prices. The Reserve Bank of India (RBI) kept rates unchanged at 6.5% in October. This was against expectations of a hike and kept it unchanged in December. Further, RBI signalled greater tolerance for a weaker INR. In addition, there are uncertainties about RBI’s political stance after the abrupt resignation of former Governor Patel.”

“We would caution against turning too positive on INR particularly after the strong gains in Q4 2018. It remains vulnerable to a rebound in oil prices along with further gains in the USD on expectations of continued Fed rate hikes. In addition, there are domestic risks in the run-up to the nationwide parliamentary elections scheduled for April-May 2019.”

“The main risk factors remain elevated oil prices, second-round effects of higher house rent allowances (HRA), and pass-through from weaker INR. No urgency for RBI to hike anytime soon RBI left rates unchanged in the last two meetings of 2018 at 6.50% after hiking by a total of 50bp in 2018.”

“There are uncertainties on how this will turn out. There are already signs that RBI is more willing to support the government’s initiatives. There were reports earlier this year that RBI will transfer an interim dividend of USD4.3-5.8bn to the government by March.”