Bias: bearish-to-range-bound, as the INR is below the 90-day average and in the lower half of the 3-month range.
Key drivers:
- Rate gap: The Reserve Bank of India has maintained higher interest rates compared to the People's Bank of China, putting downward pressure on the INR against the CNY.
- Risk/commodities: Recent volatility in oil prices is weighing on the Indian economy, which is heavily dependent on oil imports, thereby affecting the INR.
- Trade deficit: The significant trade deficit in India has been exacerbated by U.S. tariffs, which could continue to create challenges for the INR's recovery.
Range: The INR/CNY is likely to hold within its recent range, unless significant shifts occur in either country's economic outlook.
What could change it:
- Upside risk: A successful resolution to trade talks with the U.S. could improve investor confidence and support the INR.
- Downside risk: Continued capital outflows could further weaken the rupee if investor confidence does not recover.