US-Turkey saber-rattling hurts EMs

The strong US dollar is expected to further weigh on the Indian Rupee, which hit a low past 70 to the greenback in recent foreign exchange movements (mid-Aug 2018), according to Singapore’s DBS Bank Group.

A challenging global environment has compelled the Reserve Bank of India (RBI) to intervene aggressively this year to contain INR depreciation. Foreign reserves have declined from a record high of USD426 billion in April to USD403 billion in early August,” said the bank in its daily market report.

“Contagion worries from the US-Turkey saber-rattling hurt the Emerging Markets (EM) currencies, with the Indian rupee depreciating to a record low past 70/USD (down 9% Year to date),” said DBS.

Fund allocations away from EM markets is likely to persist, as the US Fed tightens policy.

“We expect further risk-off trades and USD strength to weigh on the Indian rupee,” it said.

Comfortable adequacy ratios suggest there is more room to battle Foreign Exchange volatility.

Inflationary risks have receded for the short-term helped by base effects and seasonal factors, but rupee direction and oil are risks for inflationary expectations.

The RBI-led monetary policy committee front-loaded rate hikes to contain elevated core inflation.

Inflation outturns will dictate monetary policy, especially if persistent and sharp rupee weakness adds to the risks, it said.

“We retain our call for a 25bp hike in the March 2019 quarter, with the door open for more if risk conditions deteriorate sharply,” said DBS in the report “India chart book: Growth is back, so is volatility”.

The Fiscal Year 2019 growth trajectory should be viewed in two halves – strong 1H before momentum tapers, said DBS.

“We revise up our real GDP estimate to 7.4% from 7.2% previously.” fiinews.com