INR: Stability at any cost?
• Economics: Policymakers in India want to stabilise the INR. We evaluate a set of
potential options that policymakers could consider. Such measures, in our view,
include direct intervention in foreign exchange markets by the RBI, further
tightening of liquidity, and issuance of INR global bonds or FX-denominated
deposits for nonresident Indians.
• The Reserve Bank of India (RBI) has already acted aggressively, tightening liquidity
and hiking the upper end of the policy rate corridor, in an attempt to stem ongoing
INR weakening. The RBI's surprise tightening has been stark, but similar to that in
early-1998, soon after the Asian crisis.
• It seems that the RBI expects its actions to meaningfully reduce speculative
pressures on the INR. We, however, feel that the current steps will be relatively
ineffective to support the INR, if not counterproductive, unless followed quickly by
other policy initiatives. However, different measures will have different effects on
different asset classes in fixed income markets.
• FX: Recent measures by the RBI and policy uncertainties have increased upside risks
to our near-term USD/INR forecasts. For the medium term, we still expect INR
appreciation against USD, given that the INR is significantly cheap relative to history
and to its peers. We still expect USD/INR at 59 in 1 month, and 56 in 12 months,
• Rates: Even though a liquidity squeeze may stem INR weakness, the collateral
damage is to foreign bond flows, which the government has been cultivating for
many months. We think INR stability this week has more to do with external factors
than the adopted measures, giving markets a false sense of security. We expect a
long period of uncertainty. Should the external environment become supportive,
yields will grind lower, but will factor in a sizeable risk premium. Finally, available
policy options eliminate the tail risk.
• Credit: At current levels, bonds of Indian issuers are fairly priced. If they lag the
market by 15-20bp, we would recommend buying into the complex. Most courses of
policy action to stabilise the INR should have a positive spillover effects in the credit
market. From a curve perspective, the 2016s and 2017s offer attractive carry and
rolldown.
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• Economics: Policymakers in India want to stabilise the INR. We evaluate a set of
potential options that policymakers could consider. Such measures, in our view,
include direct intervention in foreign exchange markets by the RBI, further
tightening of liquidity, and issuance of INR global bonds or FX-denominated
deposits for nonresident Indians.
• The Reserve Bank of India (RBI) has already acted aggressively, tightening liquidity
and hiking the upper end of the policy rate corridor, in an attempt to stem ongoing
INR weakening. The RBI's surprise tightening has been stark, but similar to that in
early-1998, soon after the Asian crisis.
• It seems that the RBI expects its actions to meaningfully reduce speculative
pressures on the INR. We, however, feel that the current steps will be relatively
ineffective to support the INR, if not counterproductive, unless followed quickly by
other policy initiatives. However, different measures will have different effects on
different asset classes in fixed income markets.
• FX: Recent measures by the RBI and policy uncertainties have increased upside risks
to our near-term USD/INR forecasts. For the medium term, we still expect INR
appreciation against USD, given that the INR is significantly cheap relative to history
and to its peers. We still expect USD/INR at 59 in 1 month, and 56 in 12 months,
• Rates: Even though a liquidity squeeze may stem INR weakness, the collateral
damage is to foreign bond flows, which the government has been cultivating for
many months. We think INR stability this week has more to do with external factors
than the adopted measures, giving markets a false sense of security. We expect a
long period of uncertainty. Should the external environment become supportive,
yields will grind lower, but will factor in a sizeable risk premium. Finally, available
policy options eliminate the tail risk.
• Credit: At current levels, bonds of Indian issuers are fairly priced. If they lag the
market by 15-20bp, we would recommend buying into the complex. Most courses of
policy action to stabilise the INR should have a positive spillover effects in the credit
market. From a curve perspective, the 2016s and 2017s offer attractive carry and
rolldown.
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