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The Indian rupee is likely to struggle against the dollar as slowing global growth and the Federal Reserve’s interest rate stance overshadows Reserve Bank of India’s intervention, Societe General suggested in a note on Friday.
“The RBI is likely to intervene at key levels such as 80,” Kunal Kundu, economist at Societe Generale, wrote in the note.
“However, we believe that such interventions would provide opportunities to buy on dips in the USD/INR, rather than establish sustained INR strength vs the USD.”
The rupee was trading at 79.88 per U.S. dollar on Friday, barely changed from the previous session.
The rupee has been hovering just above the 80 levels in recent sessions on the back of expectations that the RBI will sell dollars to prevent the currency from falling below its record low of 80.0650.
The return of foreign portfolio flows to equity has kept the rupee pegged to the near-80 level. Foreign inflows into Indian equities hit almost $6 billion so far in August. “We believe the global growth slowdown story could act as a headwind to positive equity inflow momentum,” Mr. Kundu flagged.
In addition, a failure by the Federal Reserve to pivot to a dovish stance and reinstate its objective to contain inflation, would reverse some of the recent momentum in equity portfolio inflows, he pointed out.
Meanwhile, Fed officials have kept a fairly hawkish tone following the softer-than-forecast U.S. July inflation data, in a bid to push back against expectations that it could cut rates later next year.
The market is currently pricing in close to 60% probability that the Fed will raise rates by 75 basis points for the third consecutive time next month. Fed Chair Jerome Powell’s speech later in the day at Jackson Hole, Wyoming, will likely provide more cues on the rate hike path.
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