Indian Rupee: Stable range with shallow gains against US Dollar – DBS

DBS Group Research indicates that the Indian Rupee (INR) has settled around the mid-94 range against the US Dollar (USD), with relatively shallow gains since earlier outperformance driven by intervention and inflows. Despite rising oil prices and expectations of US rate hikes supporting the Dollar, the USD/INR is anticipated to experience minimal pullbacks.

Strong inflows have increased the banking system surplus, reaching over INR 10 trillion, the highest level since 2022 and Covid-19 periods, which has suppressed overnight call rates. These factors have contributed to a narrowing excess liquidity, making it harder to absorb. The upcoming August inflation data, projected to reach 4.8-4.9% from 4.4% last month, due to rising food prices and precious metals, may further influence the currency.

If the Reserve Bank of India (RBI) attempts to drain liquidity prematurely, it could potentially exert upward pressure on bond yields. Currently, Indian rates are under upward pressure as the RBI has limited incentives to counter the recent hawkish stance, with abundant system liquidity.