Indian Rupee On Course for One-year Best Performance but "Too Early" to Know if it will Last says ING

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- INR extends gains but is not out of woods yet says ING.

- Lower oil and inflation ease pressure but for how long?

- RBI to eschew December rate hike, move once into 2019.

The Rupee is on course for its best one-month performance in over a year this November but it is too early to tell whether the Indian currency really has turned a corner, according to economists at ING Group

India's Rupee has been the worst performing Asian currency for 2018 but it's pared losses against the U.S. Dollar rapidly in November as the greenback has softened and after oil prices deepened their retreat from earlier highs, relieving the Indian currency from two of its heaviest burdens. 

Rising oil prices had lifted inflation and forced Indians to sell more Rupees on internationals market than they otherwise might have in order to pay for Dollar-denominated imports. So with Brent crude falling 15% from $80 per barrell in October to just $67 in November, the Rupee has earned some respite. 

A more modest performance from the Dollar in November has also eased pressure on the Indian currency, enabling the USD/INR rate to decline gently throughout the month. 

"The Indian rupee (INR) isn't left out of the recent emerging markets currency rally. However, based on just a couple of weeks of appreciation it's premature to judge that the worst is over," says Prakash Sakpal, an economist at ING Group. 

Above: USD/INR rate shown at daily intervals.

However, India's economy remains under pressure and the inflation outlook is such that the Rupee may now not be able to count on the Reserve Bank of India (RBI) coming to its rescue with another interest rate rise toward the end of the year. 

"With tight liquidity depressing investment and the drag from net exports continuing to widen, GDP growth is poised to slow," says Sakpal. "The industrial production data for September is expected to testify to this view after a dismal export growth in that month." 

Sakpal flags that poor export growth during recent months is likely to mean the Indian trade deficit widened in October, leading international trade to make a negative contribution to GDP growth. Exports are a credit in the calculation of GDP while imports, such as oil or any other material, are a subtraction.  

He and the ING team say the Indian economy is likely to have slowed during second quarter, with GDP growth falling from 8.2% at the beginning of the year to 7.5% during the three months to the end of September. The data will be released on November 30. 

If Sakpal is right then India's recent economic performance will give the RBI even more reason to sit on its hands at the December interest rate meeting, rather than announcing the rate hike that many economists had previously come to expect. The inflation picture had already made a December hike a close to call. 

Above: Pound-to-Rupee rate shown at daily intervals.

"Global pressure points from high oil prices and currency depreciation pressures have ebbed in the near-term, even if not vanished, in our view," says Radhija Rao, an economist at DBS Bank. "Considering the recent correction in oil prices and resultant relief rally in the rupee, the pressure on the RBI to raise rates has eased." 

Indian inflation fell to 3.3% in October, from 3.7% back in September, makeing its third consecutive month beneath the RBI's 4% target. The RBI hiked its interest rate by 50 basis points earlier this year, to 6.5%, citing inflation that was in danger of getting too far ahead of the 4% target. 

However, core inflation jumped to 6.2% from 5.8% previously, taking it across the Rubicon that is the 6% threshold. Core inflation is thought of as a truer measure of domestically generated inflation pressure because it excludes volatile commodity items like energy from the goods basket, prices of which can be influenced at the international level. 

This leaves overall inflation at tolerable levels for the RBI but the core data shows clearly that threats to its inflation target remain. So although the Rupee may not benefit so much from interest rate policy changes at year-end, rate hikes cannot yet be ruled out for 2019. 

"Such a growth-inflation dynamic reduces the odds of the RBI changing its monetary policy at the forthcoming bi-monthly meeting on 5 December," says Sakpal. "With a firmer rupee, stable inflation, and, more importantly, the ongoing tussle with the government, the RBI has strong grounds to leave the policy on hold.

Above: Brent crude oil futures at daily intervals. 2018 rally and October capitulation.

"Risks, nonetheless, remain to tighten policy in March 2019, subject to global developments (impact on rupee) and commodity prices," says DBS' Rao. 

Sakpal has abandoned his forecast for a 50 basis point interest rate rise in December following recent events in the oil market, as well as developments around inflation and the economy. But he too also still says another similar move is in the cards for the 2019 year. 

He and the ING team have upgraded their Rupee forecasts to reflect lower oil prices, a less rampant U.S. Dollar and an easing of tensions between the RBI and Indian government, but Sakpal has warned clients of renewed losses once into the 2019 year. These are set to take the Rupee down to fresh record lows against the Dollar. 

"We have revised our end2018 forecast for USD/INR from 76.5 to 74.0. However, the potential escalation in the political uncertainty amid legislative assembly elections in five states this month, and in the run-up to the national elections in May 2019, will sustain the weakening bias on the INR. We continue to see the USD/INR rising past the 75 level against the USD in the next three-to-six months," Sakpal writes, in a note to clients Tuesday. 

The USD/INR rate was quoted 0.34% lower at 72.60 Tuesday but has risen 13.75% in 2018, while the Pound-to-Rupee rate was 0.46% higher at 94.05 and has risen 9.15% this year. 

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