India Economics Weekly:New rates and FX forecast

类型：宏观经济机构：德意志银行研究员：德意志银行研究所日期：2017-07-24

Rates. We have changed our rate call post the release of the June CPI inflationdata. Earlier, we were expecting the central bank to maintain an extended pause.

We now expect RBI to cut the policy rate by 25bps on 2 August, thereby pushingthe repo rate down to 6.0%. The central bank had revised their inflation forecastsignificantly downward in the last policy, and even then the June inflation printcame below the lower bound of the new forecast range for 1HFY18. Given thelower-than-target June inflation print, we think the central bank will be able tojustify a 25bps rate cut in the August monetary policy.

FX. We are also changing our INR/USD forecast, given the recent changes madeby our global FX team for the G10 currencies, particularly EUR/USD. We nowexpect rupee to end 2017 at 66 (vs. 67.5 earlier) and we also revise our end-2018forecast to 66 (vs. 69.5 earlier). Our earlier rupee forecast was based on thepremise that USD strength will re-emerge in a significant manner in the 2H of2017 against most G10 currencies, which will then impact EM FX as well. Ourglobal FX team has recently revised their EUR/USD forecast to 1.17 by end-Dec’17(vs. 1.03 previously) and 1.20 by end Dec’18 (vs. 0.95 earlier). It seems now thatthe strong USD cycle of the last 6 years has topped out and Euro has hit its bottomin December of last year. As far as rupee is concerned, we are maintaining aslight depreciation bias against the USD for the coming quarters, as we expectthe balance sheet reduction programme of the Fed to potentially impact theflow dynamic in EM countries, to which India may not remain immune, despitehaving a comfortable BOP position. Potential increase in UST yields (our end-2017forecast is 2.75%, rising further to 2.85% by June 2018) could lead to outflowsfrom the bond market, a risk which we factor in our rupee forecast. Moreover,India’s stock market is currently at an all time high and any correction in globalequity markets could also trigger a correction at home and impact the rupee.