This week the spotlight has been cast on India covid cases spiralling, with a new local variant also adding to concerns. While on paper selling INR seems a straightforward expression of the risks involved, there are complications to note in this case. Still, economists at Credit Suisse can envisage a scenario that sees USD/INR push to test its all-time high seen last year at 76.72 in coming weeks.

Covid risks multiply but RBI complicates the FX picture

“For a variety of reasons including religious festivals, political rallies, relatively low vaccine take-up (despite the country being a major producer) and government reticence to impose lockdowns ahead of state elections, daily covid infection rates are spiralling, with a new local variant also adding to concerns.”

“While on paper selling INR seems a straightforward expression of the risks involved, there are complications to note in this case. Firstly, being short INR has a clear negative carry problem, with 1m NDF implied INR rates around 6%. Secondly, the RBI is in a powerful position to resist excessive INR depreciation. With $542bio of total reserves as of Dec 2020, and having added still more in the early months of 2021, the RBI is in a strong position to try to limit INR weakness.”

“The fact it has already allowed spot INR to fall 3% in April vs USD despite general USD weakness elsewhere suggests the central bank might yet be willing to tolerate more INR losses, and we can envisage a scenario that sees USD/INR push to test its all-time high seen last year at 76.72 in coming weeks.”