The backdrop of global risk aversion and higher oil prices are negative factors for the Indian rupee according to analysts at MUFG Bank. They forecast USD/INR at 76.000 by the end of the first quarter and at 76.500 by the second quarter.
Key Quotes:
“The global backdrop of risk aversion due to Russia’s invasion of Ukraine, the surge in Brent crude oil prices to levels above USD100/bbl, and upcoming policy tightening by the Fed are major factors that will undermine the rupee. Given the relatively inelastic demand for oil, particularly amid economic recovery, higher volume of oil imports coupled with higher oil prices would translate into a larger import bill this year.”
“With gold demand to rise as well due to its safe haven aspect and buffer against inflationary pressures, India’s trade and current deficits are set to widen this year.”
“Factors that could have helped offset net capital outflows due to risk aversion and imminent Fed rate hikes have also diminished. This is primarily due to the potential delay in India’s sovereign debt inclusion in a few global bond indices as the FY22/23 Union Budget failed to address tax changes that will allow Indian bonds to be traded on the Euroclear platform.”
“On balance, we expect USD/INR to head higher with our end-2022 forecast at 77.500, which is above the record high of 76.920 recorded in April 2020.”