Barclays pointed out that the Reserve Bank of India (RBI) appears to be allowing the exchange rate to find a modern swing range, which is influenced by various economic factors.
The bank predicts that the USD/INR rate has the potential to gradually reach around 84.40, although it also anticipates an increased risk of retracement with each 0.5 unit change in the rate.
According to Barclays, the RBI’s stance is driven by rising prices, record high gold prices, a strengthening US dollar and rising risk aversion in the region. These factors contributed to foreign portfolio investors becoming net sellers of Indian equities in October. Despite the recent decline in oil prices, Barclays expects other balance of payments challenges to persist in the near term, which may prompt the RBI to tolerate a modern range for USD/INR.
Barclays also expects foreign investors to continue reducing their overweights in Indian equities towards the end of the year. This trend may be fueled by slowing economic growth, an uncertain outlook for domestic inflation and a reassessment of the position of emerging markets ahead of the November US elections.
However, the report noted that this is unlikely to cause a significant decline in Indian equity indices due to sturdy domestic purchasing and the financialization of household wealth in India.
The financial institution suspects that the recent RBI revision of USDINR above 84 may be due to the acute rise in the nominal effective exchange rate of the Indian rupee (NEER) since September-end.
Barclays analysis shows significant changes in the NEER INR since 2000, with the last change occurring in 2020, which coincides with the RBI’s revisions to the NEER calculations.
Barclays also mentioned that the International Monetary Fund (IMF) has reclassified India’s exchange rate regime from ‘floating’ to ‘stable’ from December 2022 to October 2023 based on exchange rate management by the RBI. The RBI, however, disputes this reclassification, maintaining that its interventions were intended to address market disruptions.
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