Good news! Rupee may pave the way for RBI repo rate cut

The trading week on Monday, kicked off with Indian rupee depreciating by 16 paise to 69.11 against US dollar benchmark indices at interbank forex market. This was due to weak opening of benchmark indices Sensex and Nifty 50 and also month-end opening for the American currency. Last week, Indian rupee finished at 68.95 paise against the dollar index. Interestingly, in coming days rupee is set to strengthen, and in fact will be one factor that will boost the Reserve Bank of India (RBI) monetary policy for a repo rate cut. Rating agency CLSA points out that, rupee has gained 7% from its all-time lows made in Oct’18, as CAD stabilised and foreign capital inflows improved due to global factors and expectations of a stable Government. In the same period, the foreign investors have bought Indian equities worth $6 billion.

According to CLSA, recent RBI measures are good for USD capital flows, and global bond yields falling should support the INR well. Impending large rights issues/FDI deals are also supportive of a stronger currency.

On flip side, CLSA says, “India’s current account balance, excluding oil and gold, is at a six-year low and is a structural negative. Also, lower imports imply weak domestic demand conditions which add to the worries of domestic slowdown in auto numbers and recent commentary from HUL.”

Also, INR on REER basis, has not appreciated over the last six months. Further, the INR has actually underperformed Asian peers in both 2018 and YTD’19. CLSA adds, “This suggests that the INR can sustain its gains along with Asian peers going ahead.”

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On FIIs, CLSA noted that, the INR improvement/FII flows to India are coming along with the trend change for the same for EMs. Asian currencies have been appreciating against USD since late’18. A dovish US Fed and recent dovish change in ECB stance are supportive.

A few data check: The country’s forex reserves have  risen by $14 billion from their Oct’18 lows to US$406bn as of 15 March but are still short of the peak of $426 billion. CLSA believes, RBI would target to build FX reserves back to peak, partly with an aim to smoothen INR volatility as well.

Thereby CLSA reteriates that, a rising INR, below target inflation readings and a slow economy does give RBI enough excuse to take another benchmark rate cut in its 4 April meeting.

On overall rupee, CLSA says, “we believe the strength in INR is sustainable which has negative repercussions for exporters. Potential rate cuts should be a positive for financials.”