The INR has underperformed as India's....>

DOLLAR-INR: The INR has underperformed as India's inflationary pressures have

risen. USDINR finished Friday's session just shy of 65.00, well off the YtD lows

made in early Jan.

- The INR's weakness probably isn't justified by the fundamental outlook, as

mentioned in our "Weak Rupee, Bonds Not Justified By India Econ" piece (See Main

Wire At 11:16 GMT 03/16). Fundamental inflationary pressures remain contained &

econ. growth is likely to continue to outperform given the passed/impending

structural reforms. Rising oil prices and the impact of the recent increase in

import duties on certain goods will likely see CPI rise over the coming months,

but underlying inflationary pressures should remain anchored. The INR, while

slightly overvalued in real eff. terms, should be supported by its real bond

yields, which are among the highest in the world.

- Elsewhere, India's external balance sheet is in the best shape it has been in

years, with FX reserves building up throughout the recent period of rupee

weakness, suggesting that the RBI has been steering the currency weaker in order

to support exporters rather than yielding to fundamental depreciatory pressure.