Outlook
Near term, the INR is likely to stay in a cautious zone around current levels as CAD pressure, oil price dynamics, and global risk sentiment influence flows. The RBI's flexible intervention policy is expected to smooth volatility rather than defend a fixed level. Any improvement in India’s external balances or stabilization in global financial conditions could provide modest support, while renewed risk-off mood or higher oil prices could push USD/INR higher.
Key drivers
- Persistent Current Account Deficit (CAD): A widening trade gap and heavy crude imports keep downward pressure on the INR.
- Foreign Portfolio Investment (FPI) Outflows: Intermittent outflows from Indian equity and debt markets, driven by global risk sentiment and U.S. rate expectations, weigh on the rupee.
- Weak Manufacturing Exports: Slowing export growth amid global demand challenges adds pressure.
- Policy Rate Differential with the U.S. Narrowing: The shrinking gap between Indian and U.S. policy rates shapes investor behavior.
- RBI's Intervention Strategy: A flexible exchange rate approach aims to smooth volatility rather than defend a specific level.
- Geopolitical Tensions: Military actions and diplomatic strains affect investor confidence and rupee stability.
- U.S. Tariffs on Indian Exports: Tariffs impact trade balances and market sentiment.
Range
Current levels show USD/INR at 0.011041, 0.5% below its 3-month average of 0.011099, having traded in a 4.1% range from 0.010864 to 0.011304. INR/EUR at 0.009337 is 1.6% below its 3-month average of 0.009487, with a 7.9% range from 0.009085 to 0.009803. INR/GBP at 0.008115 is 2.0% below its 3-month average of 0.008281, within a 10.0% range from 0.007872 to 0.008659. INR/JPY at 1.7362 is near its 3-month average, having traded in a 6.7% range from 1.6648 to 1.7759.
What could change it
- Shift in US rate path/global risk sentiment: A clearer rate trajectory or a risk-on/off shift could alter flows.
- Oil price moves: Significant crude price changes would affect the CAD and INR dynamics.
- RBI policy stance/FX interventions: Changes in policy or intervention frequency could alter volatility.
- Geopolitical developments: Diminished tensions or escalations could sway risk appetite.
- Trade developments/export performance: Improvements or deterioration in exports or new tariffs could influence sentiment.
