INR: Rupee Hits Fresh Record Low Ahead of Expected RBI Easing Step

The rupee ended the session 0.14% lower against the dollar, reaching a fresh record low amid weakness across the wider Asia FX space. The expected rate cut from the RBI tomorrow has weighed on rupee sentiment this week, while outflows from local equities and dollar demand from importers continue to act as familiar broader headwinds.

• According to three traders who spoke to Reuters, the central bank has likely been conducting buy/sell dollar-rupee swaps in addition to selling dollars to support the rupee, with further intervention evident overnight. Routine dollar sales from the RBI has resulted in a significant drawdown of India’s FX reserves – falling from a peak of around $700bln in September to as low as $624bln in mid-January.
• However, early indications from January data are that the level of FX support from intervention is set to decline; perhaps indicating that the new Governor may be less likely to defend the rupee. Regarding tomorrow’s rate decision, market expectations have moved rapidly since December given the focus on liquidity from the RBI, and the moderation of inflationary pressures.
• We forecast a 25bp cut at the upcoming meeting to support growth, accompanied by a neutral stance. At best we see a shallow, opportunistic rate cutting cycle of 50-75bps between now and mid-year, contingent on the pathway for inflationary pressures. See our full preview, with a summary of sell-side analyst views, here: https://mni.marketnews.com/3EBx3at