Bias: Bearish-to-range-bound, as the INR is below the 90-day average and in the lower half of the recent 3-month range.
Key drivers:
• Rate gap: The Reserve Bank of India is facing challenges due to significant capital outflows, while the European Central Bank maintains a neutral policy, providing some support to the euro.
• Risk/commodities: With oil prices currently higher than the 3-month average, this supports the euro, although elevated energy costs may impact overall economic conditions in Europe.
• Macro factor: India's growing trade deficit, exacerbated by U.S. tariffs on exports, continues to exert pressure on the rupee, contributing to its weakness.
Range: The INR/EUR pair is likely to drift within its recent 3-month range, facing obstacles to moving higher.
What could change it:
• Upside risk: Progressive trade negotiations between India and the U.S. leading to improved investor confidence could support the rupee.
• Downside risk: Continued capital outflows or deterioration in India's trade balance could further weaken the INR against the EUR.
