Commerzbank’s Charlie Lay and Dr. Henry Hao note that the outlook for the Indian Rupee (INR) has brightened as lower Oil prices and renewed foreign capital inflows ease balance-of-payments pressures. USD/INR has held near 94.40, with INR the best-performing Asian currency versus the Dollar in June. Strong reserves and policy focus on inflows are seen keeping USD/INR near the lower end of its recent 94-96 range.

Rupee buoyed by oil and inflows

“The outlook for INR has improved in recent weeks as lower crude oil prices and renewed foreign capital inflows have helped to ease pressure on India’s balance of payments. USD/INR held steady last week and was slightly lower at around 94.40 after falling by 0.8% the previous week.”

“So far in June, INR has recovered the most among Asian currencies vs USD, up 0.6%, followed by PHP by 0.5%. This was largely driven by the sharp drop in oil prices following the recent reopening of the Strait of Hormuz.”

“Lower crude prices have reduced concerns over India’s energy import bill and inflation outlook, while also improving investor sentiment towards Indian assets. India’s foreign exchange reserves gained 0.1% to USD672.6bn in the week ending 19 June. It is among the largest in emerging markets and provides RBI with ample capacity to smooth episodes of excessive currency volatility.”

“Looking ahead, the combination of lower oil prices, improving portfolio inflows, and ample foreign exchange reserves should help keep USD/INR near the lower end of its recent 94-96 trading range of the past month. While capital-flow measures should continue to underpin INR, global oil prices remain the single most important determinant of the rupee’s near-term outlook.”

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