MUFG’s Michael Wan notes strong Indian Rupee (INR) outperformance driven by larger-than-expected US Dollar (USD) inflows from Reserve Bank of India’s (RBI) FCNR(B) measures, which now exceed US$130bn. Wan still expects USD/INR to trend higher over time but argues that RBI’s FX measures have reduced left-tail depreciation risks. MUFG also sees scope for higher Indian rates given robust macro conditions and forecasts a 50 bps RBI hike from December.

Rupee support and rate outlook

“In particular, we saw strong outperformance in the Indian Rupee, driven by much higher than expected Dollar inflows from RBI’s FCNR(B) FX measures, reaching above US$130bn in total as of 31 Aug.”

“Our key message to clients is that we still think USD/INR should trend higher over time, but RBI’s FX measures has given authorities meaningful firepower and ammunition, and as such we continue to think the left tail risk of sharp INR depreciation has been removed.”

“We are somewhat less circumspect from a rates perspective however, and we think that incremental pricing in the market can shift towards rates moving higher, given the broader macro dynamics of strong credit and GDP growth, supportive fiscal policy, and interaction with adverse weather conditions.”

“We continue to see RBI hiking rates by 50bps starting in the December meeting.”