USDINR continued to rally today, currently....>

INDIA: USDINR continued to rally today, currently at 65.77, and testing the

September 2017. The weakness is coming in spite of rising government bond

yields, with the 2-year yield testing 7.00% today, close to its highest level

since 2016.

-The relentless rise in U.S. 2-year yields, however, means that India-U.S.

2-year yield spread remains close to its lowest level since 2010.

-In order for the INR to recover against the dollar we would likely need to see

Indian inflation pressures continue to head lower from already low levels, which

seems unlikely. Alternatively, a spike in U.S. inflation expectations would also

support the INR.

-That said, following recent weakness the rupee has become relatively cheap

compared to the rest of Asia, and the positive interest rate spread vs most of

its peers should see the currency outperform in total return terms.