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Coronavirus Woes and Dovish Minutes


The rupee managed to get back to neutral levels yesterday, a weaker greenback seeing USD/INR reclaim its opening gap. A stronger USD on safe haven demand could see a weaker rupee at the open though, USD/INR 1-month forwards last at 75.46 from around 75.30 at the cash close yesterday.

  • The coronavirus situation continues to deteriorate, Indian PM Modi is due to hold meetings with stakeholders and officials to review conditions. Several countries have now banned visitors from India, Singapore the latest.
  • The main focus of the MPC minutes was the COVID resurgence and associated growth risks, with members downplaying input-cost driven inflation risks and emphasizing the need to continue the accommodative policy mix until the nascent growth recovery has built momentum.
  • Goldman Sachs are more dovish on the RBI post-minutes and given current conditions. "Given the virus upsurge we recently pushed back the timeline for calibrated liquidity tightening, and expect effective rates to get back up to the policy rate of 4.0% only by Q1 2022 (from end-2021, previously). We continue to expect that back-end rates will likely move higher over the coming year given stretched valuations, adverse demand-supply fundamentals, high and sticky core inflation, surging commodity prices and higher global rates. However, as shown with the RBI's bond purchase program, the central bank remains committed to using its balance sheet to make this shift to higher equilibrium rates in a gradual and calibrated way, with perhaps a greater degree of comfort with higher yields in the second half of FY22 (October 2021-March 2022), if there is evidence that the growth recovery is broadening and gaining strength."

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