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MOSL: ECOSCOPE-INR to touch 70 against the USD by 1HCY19; BoP deficit and political uncertainty to weaken INR

ECOSCOPE: INR to touch 70 against the USD by 1HCY19; BoP deficit and political uncertainty to weaken INR

 

• A number of factors such as the unusual combination of a stronger USD and high crude oil prices, India's widening twin deficit, and foreign institutional investor (FIIs) outflows have contributed to the recent ~5% weakening of the INR against the USD. However, the INR remains strong in real terms against the USD and also against the basket of six major trading partners' currencies.
• Our analysis of the long-term INR trends suggests that the movement in the USD index (trade-weighted against major currencies) is the most important determinant of the INR movement, followed by the movement in India's foreign exchange reserves (or balance of payments, BoP) and India's twin deficit (sum of fiscal deficit (FD) and current account deficit (CAD)). Higher crude oil price, however, does not necessarily imply a weaker INR unless it is accompanied by capital outflows (or weaker BoP).
• Although we do not expect any rally in the USD in 2018 and 2019, India's BoP (sum of the current and capital/financial account) is likely to witness its first deficit in seven years in FY19 versus massive surplus of USD43.6b in FY18. Further, real GDP growth is likely to remain at sub-7% for the second consecutive year and the twin deficit is expected to stay at elevated levels of 8.2% of GDP in FY19. Finally, along with the general election in May 2019, five major states are scheduled for assembly elections between end-2018 and mid-2019.