TD Securities: Position For Renewed Weakness

TD Securities believe that “INR to struggle will struggle in the weeks ahead” and recommend “positioning for renewed depreciation amid widening trade and current account deficits.”

• They go on to suggest that “it’s hard to see the trade and current account deficits narrow much, especially as oil prices are likely to move higher, while domestic demand continues to strengthen. Given that the Fed is primed to hike rates and is accelerating the pace of tapering, India may struggle to see a rebound in portfolio inflows. The worsening in India's broad basic balance position implies less support for INR and more susceptibility to bouts of risk aversion. The rupee is looking stretched from a valuation perspective. As such, a weaker currency may help exporters, something that the RBI would likely want to encourage. We forecast USD/INR to reach INR75.4 by end Q1, with INR risks skewed to the downside. Rather than initiate a long USD position vs. INR, we prefer limited carry cost ideas such as short INR/IDR or long CNH/INR.”