India: INR not out of the woods yet, focus shifts on the RBI – Nomura

A deteriorating EM risk backdrop and pressure on current account deficit currencies has led USD/INR to multi-year highs, explains the research team at Nomura.

Key Quotes

“We see risk of continued INR depreciation in the near term.”

“Local factors for depreciation include limited intervention by the Reserve Bank of India (RBI) and limited concerns, in our view, over FX depreciation (watch this space), a lack of urgency to hike rates, rising political risks, and a large trade deficit with a higher oil price and portfolio outflows.”

“However, there are reasons to expect INR depreciation to be controlled, given the substantial space for policy action by the RBI and government (if desired).”

“Option positioning risk (selling of high strike INR puts) is also less of an RBI concern, while the dual deficits are a drag on INR, but have become less so over the past five years.”