Indian Rupee: RBI seen defending 97 band onshore – Societe Generale

Societe Generale analysts see the Reserve Bank of India (RBI) maintaining a neutral stance for the Indian Rupee (INR) in their August policy review. Governor Malhotra has expressed that the INR is not undervalued. The central bank is expected to defend the 97 onshore level while accumulating Dollars and keeping the INR within a 94-97 range over the coming weeks.

While the RBI's decision to pause policy is understandable, its inflation communication may be perceived as too confident. Core inflation suggests weak demand and limited pricing power, reducing the risk of a demand-driven inflation spiral. However, the RBI's focus on potential supply shocks, food acreage gaps, energy volatility, imported cost pressures, and firming expectations could be overly optimistic.

A more balanced approach would retain policy patience with a stronger warning about the fragile disinflation path. The current inflationary outlook appears contained, but future risks are uncertain, with the possibility of persistently higher inflation. Rising household inflation expectations also pose a risk. The central bank's apparent complacency is a concern.

For FX, today's decision was neutral, with fewer comments on INR movements and portfolio flows. Despite this, the RBI is expected to continue defending the 97 level onshore and accumulating USD as the INR strengthens.