DBS Asian Currency Research : Monetary policy divergences intact

Indian Rupee Highlights

View intact - USD/IDR to rise in lowest quartile of ascending price channel

- The INR has been depreciating in a narrow price channel since May 2014 after its recovery from the emerging market volatility in 2013.

- Instead of weakness, this channel reflects the success of the central bank (RBI) in minimizing exchange rate volatility against the globally strong USD from monetary policy divergences.

The RBI did this by accumulating foreign reserves when risk appetite improved, and strategically using this war chest to stabilize the rupee when volatility returned.

- In stabilizing the INR's depreciation, this has allowed the RBI to better manage inflation and lower interest rates this year. CPI inflation has been within the official 4±2% target band since Sep14. RBI lowered its policy rates four times since Jan15.

- Keeping the INR aligned with the depreciation in Asian currencies should also help to cushion the Indian economy against the weak external sector. Exports contracted 17.1% YoY in Jan-Sep15, the first double-digit decline since 2009. Despite this, rating agencies continued to view India favourably.

Source : Equity Bulls

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