USD/INR broke out of its tightly held range to move back above 75, in line with higher energy prices. As economists at Société Générale note, higher oil prices is the key near-term risk for USD/INR.

Trade deficit widens to multi-year highs

“The recent surge in oil prices has been detrimental to the INR, and as such the currency should remain under pressure until the supply-related bottlenecks causing the energy crisis abate.”

The trade deficit widened to a record high in September amid surging commodity prices, exacerbating the INR’s recent weakness.”

The RBI recently stopped its bond purchasing programme (GSAP), a clear indication of policy normalisation, and as such we believe that monetary policy should be supportive of the INR in the medium-term, especially with the RBI poised to deliver a rate hike by 2Q22.”

“Foreigners remain net buyers of Indian equities, while they turned net sellers of Indian bonds in October following a couple of months of strong inflows. As such, portfolio flows, despite losing some momentum this month, remain supportive of the currency.”