Societe Generale analysts discuss persistent headwinds for the Indian Rupee (INR) against US Dollar (USD) as India faces large Oil and Gold import bills. Economist Kunal Kundu warns of rising risks that the Reserve Bank of India (RBI) may tighten policy pre-emptively due to energy prices, urea’s gas linkage and adverse weather. They sees limited justification to oppose current INR weakness and anticipates potential RBI bond operations.

Rupee pressured by imports and RBI risks

“In Asia, the headwinds confronting the INR show no sign of lessening. The currency returned yesterday below 94.50 after opening gap down as the country grapples with hefty oil and gold import bills.”

“Our economist Kunal Kundu highlights growing risks of pre-emptive monetary tightening by the RBI, driven by a triple hit of (a) elevated energy prices, (b) urea’s tight linkage to natural gas, and (c) adverse weather from heat waves or a delayed monsoon.”

“Against this backdrop, we see little merit in trying to fade the trend and a retest of the recent high near 95.23 could be inevitable.”

“Additionally, the RBI may become more active by selling front-end and buying 10y maturity IGBs to keep the 10y yield below 7.0%.”

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