Modest Rupee Outperformance On Oil & Less Yen Sensitivity

Spot USD/INR is pushing higher, in line with the regional USD/Asia trend, but there is a modest rupee outperformance theme today, likely reflecting the sharp drop in oil prices.

• Spot rupee has weakened back towards 78.20, although we remain below recent record lows of 78.27/28.
• This is only 0.1% above yesterday's closing levels, while the 1 month NDF is down slightly from NY closing levels at 78.36.
• Lower oil prices, if sustained, will help India's twin deficit position, particularly the trade accounts.
• A broader slump in commodity prices can aid rupee outperformance against other Asian FX, but less so against the USD.
• If commodities are falling over global growth fears, USD/INR should still press higher via the risk aversion channel, although the RBI is likely to control the rate of appreciation in the pair.
• The other factor is that the rupee should be less sensitive to yen moves given lower trade linkages compared to other economies in the region, particularly those in NEA like South Korea and Taiwan.
• INR’s carry characteristics also remain favourable against these currencies.