Analysts at Wells Fargo continue to believe the Indian rupee will gradually depreciate as the Reserve Bank of India (RBI) prioritizes growth and maintains an accommodative stance on monetary policy, and as the central bank continues to intervene in FX markets in favor of a weaker rupee.
Key Quotes:
“We continue to believe the currency will gradually and modestly depreciate over time against the U.S. dollar. Our rationale for a weaker rupee in the short-term primarily stems from our view that the U.S. dollar will broadly strengthen amid rising concerns about global health conditions as well as the likelihood the Fed could start shifting to less accomodative monetary policy.”
“Over the last few weeks, U.S. consumer and business sentiment has noticeably softened. We believe that softening in sentiment could increasingly become more appreciated by market participants and result in safe haven flows to the greenback, pushing the dollar higher against most foreign currencies, including the rupee.”
In addition, we believe the rise in COVID cases has made financial markets more sensitive to monetary policy announcements. In that sense, we continue to believe the Fed is on pace to formally announce a taper to its asset purchase program in December. Expectations, and eventually confirmation of, a formal taper announcement should result in renewed strength in the U.S. dollar through the end of this year. This combination should result in the USD/INR exchange rate reaching INR74.25 by the end of this year, implying around a 1.5% fall in the rupee from current levels.”
“Over the longer-term, we believe the rupee can continue to weaken and the USD/INR exchange rate could hit INR74.75 by the end of 2022. Our rationale for longer-term rupee weakness primarily stems from our view that peer central banks will raise interest rates at a quicker pace relative to the RBI.”