Although exports have cooled, strong PMI data in May (manufacturing 58.7, services 61.2) showed that Indian business activity remains firmly in expansion, pointing to continued high real GDP growth of around 7%. This favorable growth outlook, along with more balanced trade flows, should keep USD/INR in a range of 81.00-83.00 during Q3.

Continued USD strength could push the RBI to revise the intervention range higher. However, given that the 83.00 level has held since Oct (when EUR/USD was below parity), we think RBI can continue to enforce this 81.00-83.00 range without worrying about trade-weighted Rupee strength.