INR: Some headwinds in 2018 - ANZ
India’s economic reforms have been well received by foreign investors and strong portfolio inflows have pushed INR higher but it looks stretched on a real effective exchange rate basis, according to Irene Cheung, Research Analyst at ANZ.
“Given more limited room for RBI easing next year and the impact of higher oil prices on the external balance, we expect INR to weaken against the USD in 2018.”
“Slowing economic growth in India has been overlooked by foreign investors, as the focus has been on the longer term positive effects from the government’s economic reforms, the latest being the bank recapitalisation plan.”
“Moody’s upgrade of India’s sovereign rating from Baa3 to Baa2 with a stable outlook has spurred further portfolio inflows, helping to strengthen the INR. However, at current levels, the INR looks stretched on a real effective exchange rate (REER) basis.”
“The near-term growth outlook remains challenging as the impact from the GST implementation continues to be felt. The recent rise in oil prices will lead to a higher oil import bill, weakening the trade balance, though we do not expect a return to the 5% current account deficit seen in 2013.”
“The factors that supported the INR in 2017 are unlikely to repeat in 2018. There is less room for the RBI to deliver further rate cuts next year.”
“While portfolio inflows will continue, we do not expect them to match the more-than-USD30bn of inflows seen this year. With global liquidity easing as major advanced economy central banks continue policy normalisation, there will be less appetite to chase yields, especially with US interest rates set to continue rising in 2018. Given that India has a higher inflation rate than its major trading partners, the nominal exchange rate needs to weaken just to keep the REER stable. We expect currencies of current account deficit countries to underperform in 2018, and forecast USD/INR at 66.0 by the end of next year.”