Indian Rupee: RBI seen defending 97 band onshore – Societe Generale

Societe Generale’s Kunal Kundu and Galvin Chia judge the Reserve Bank of India's (RBI) August policy outcome as neutral for the Indian Rupee (INR). They highlight fewer comments on INR and flows, but recall Governor Malhotra’s view that INR is not undervalued. They expect RBI to defend the 97 onshore level, accumulating Dollars and keeping INR in a 94–97 range in coming weeks.

USD/INR expected to remain within 94–97 range

"Overall, the RBI’s policy pause is understandable, but its inflation communication looks too comfortable. Benign core inflation suggests weak underlying demand and limited pricing power, which reduces the risk of a classic demand-driven inflation spiral."

"However, India’s near-term inflation risk is not primarily about excess demand. It is about supply shocks, food acreage gaps, energy volatility, imported cost pressures and firming expectations. By lowering its inflation projection while acknowledging El Niño and geopolitical risks, the RBI appears to be placing too much confidence in a benign baseline and too little weight on the upside risks around it."

"A more balanced assessment would have retained policy patience, but with a stronger warning that the disinflation path remains fragile and vulnerable to cost-push shocks. While the current inflationary outlook appears contained, future outlook remains hazy with material risk of persistently higher inflation. Also, with household inflationary expectation on the rise, the risk of expectation getting unhinged remains real. At the current juncture, the central bank’s complacency is worrying."

"For FX, today’s decision was neutral. There were fewer comments on INR movements and portfolio flows than in June, as continued portfolio inflows have continued to reduce external macroeconomic vulnerabilities. However, we continue to see this in the context of Gov Malhotra’s comments last week, stating that INR was “not undervalued”."

"We see the RBI continuing to defend the 97 level onshore and continuing to accumulate USD as INR rallies. We think this translates to a broad 94 – 97 trading range in the coming weeks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)