INR underperforms - TDS

According to analysts at TD Securities, INR has not taken advantage of a softer USD and more benign Fed path, unlike many other EM currencies.

Key Quotes

“In fact INR is one of the worst performing EM currencies year to date, down almost 2% versus USD. The fact that it has not rallied in line with other EM high yielders likely reflects the fact that India has registered portfolio capital outflows over recent weeks, while oil prices are higher, amid concerns about fiscal slippage ahead of elections.”

“Although RBI monetary policy has been less sensitive to INR gyrations over past months, the central bank may be cognisant of any knock on impact on the currency from a rate cut. It is perhaps not the direct impact on the currency that will most concerning, but if markets perceive the RBI to have succumbed to political pressure to ease, this could do more damage to the INR. We think an unchanged outcome will leave the INR to consolidate, whereas a cut will likely lead to a further fall.”

“We are generally constructive on the INR over the months ahead, but by this we mean that the currency will gradually depreciate. We forecast USDINR to reach 72.90 by end 2019, implying around a 2.6% depreciation versus USD. We don't expect a softer profile for the USD to have too much bearing on the INR. Even with some, limited depreciation, the INR will still offer attractive carry adjusted returns compared to many other EM currencies.”