Michael Wan of MUFG predicts that the Indian Rupee (INR) will continue to be weak and that if the Iranian issue continues, the USD/INR might reach 98.00 or perhaps 100.00. According to MUFG's baseline, USD/INR is trading between 95.00 and 96.00, with the INR underperforming due to sluggish capital inflows, a larger current account deficit, rising oil prices, and possible interruptions to the energy supply.
Rupee is underperforming on several fronts.
"We continue to see the Indian Rupee as susceptible across a range of scenarios on the Strait of Hormuz, with USD/INR likely going towards 98.00 levels and even 100.00 is in sight if the crisis prolongs or escalates."
"Over here, our baseline projections for USD/INR to trade between 95.00 and 96.00 imply INR dropping further against Asia and G10 FX including EUR, JPY, and CNH." We anticipate a de-escalation.
"Weak capital inflows, a larger current account deficit due to rising oil prices, and the possibility of an extended conflict disrupting the energy supply are all factors contributing to our projection for INR underperformance. Significant left-tail risks for the INR are also introduced by potential weak Southwest Monsoon and "Super El-Nino" hazards, as well as uncertainty about future increases in US yields.
From a market standpoint, we observe that FX forwards and the onshore INR OIS curve are already pricing in a significant level of risk-premia. For example, 12-month USD/INR FX contracts are currently just below 100, although more than 125bps of RBI rate increases have already been priced over the next 12 months. However, we believe that the current situation still favors buying on USD/INR dips and paying on INR rate declines in the near future until we have more clarification on oil prices and the Strait of Hormuz. We would advise being patient rather than overly chasing levels given the current cost.
"Overall, we believe that in order for these steps to have a long-lasting effect on sustaining the Indian rupee, they would need to increase the ease of doing business in India and ultimately improve long-term earnings prospects in India relative to other markets."
Rupee is underperforming on several fronts.
"We continue to see the Indian Rupee as susceptible across a range of scenarios on the Strait of Hormuz, with USD/INR likely going towards 98.00 levels and even 100.00 is in sight if the crisis prolongs or escalates."
"Over here, our baseline projections for USD/INR to trade between 95.00 and 96.00 imply INR dropping further against Asia and G10 FX including EUR, JPY, and CNH." We anticipate a de-escalation.
"Weak capital inflows, a larger current account deficit due to rising oil prices, and the possibility of an extended conflict disrupting the energy supply are all factors contributing to our projection for INR underperformance. Significant left-tail risks for the INR are also introduced by potential weak Southwest Monsoon and "Super El-Nino" hazards, as well as uncertainty about future increases in US yields.
From a market standpoint, we observe that FX forwards and the onshore INR OIS curve are already pricing in a significant level of risk-premia. For example, 12-month USD/INR FX contracts are currently just below 100, although more than 125bps of RBI rate increases have already been priced over the next 12 months. However, we believe that the current situation still favors buying on USD/INR dips and paying on INR rate declines in the near future until we have more clarification on oil prices and the Strait of Hormuz. We would advise being patient rather than overly chasing levels given the current cost.
"Overall, we believe that in order for these steps to have a long-lasting effect on sustaining the Indian rupee, they would need to increase the ease of doing business in India and ultimately improve long-term earnings prospects in India relative to other markets."
