The rupee is tracking slightly stronger following yesterday's holiday. USD/INR is down around 0.20% versus Monday's closing level (79.65), last at 79.45/50. Onshore equities are flat at this stage, compared with weakness elsewhere in the rest of the region. Equity outperformance has been a theme for a while, with the MSCI India index up around 16.50% from mid June lows, while the world index is up just under 11% over this period.
- INR is still 1.9% weaker versus the USD over this period (since mid-June), although the outperformance in equities may be starting to filter into firmer net equity flows.
- Last week saw net equity inflows of $1.86bn, the highest rate of weekly inflows since November last year.
- At the margin this is improving India's portfolio backdrop and helping ease INR pressure, although it is still a long way to go in terms of turning the terms of trade outlook around/trade deficit backdrop.
- Moreover, RBI resolve can still be tested with tonight's US CPI release. We aren't too far away from the high 79.00/low 80.00 region, which is likely to evoke smoothing intervention flows.
- Finally, there doesn't appear to be much impact on sentiment after the ruling BJP loss power in Bihar (see this link).