USD/INR: Another year of decline expected for the Indian rupee – MUFG

During 2020 the Indian rupee depreciated against the US dollar from 71.375 to 73.548. For the year ahead, economists at MUFG Bank expect the rupee to extend its decline while current account balances are set to decline from 2020’s record surplus.

Key quotes
“India has secured COVID-19 vaccines covering 60% of the population, with the first phase distribution to begin in January. However, with India facing several challenges to inoculate the majority of its residents, economic recovery is likely to be gradual in nominal GDP terms. The RBI expects real GDP growth in 1H FY21/22 to be a wide range between 6.5-21.9% from -7.5% in FY20/21.”

“We expect the RBI to conduct further easing this year via rate cuts and continuous usage of unconventional policy tools. This is particularly in view of elevated levels of inflation which prevented the RBI from cutting rates further in 2020 and also limited fiscal space to boost the economy. The usage of unconventional policy tools such as monetisation of state government debt, operation twists and open market operations, would add downward pressure on the rupee in 2021.”

“Current account balances are set to decline in 2021 from 2020’s record surplus likely between 1.8-2.3% of GDP. Dollar weakness partly driven by the Fed’s QE would help dampen rupee losses.”

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