“We are expecting the rupee to strengthen to around 88.60-89.00 against the U.S. dollar, 2% below the bank’s previous forecast for the pair,” said Vikas Jain, head of India fixed income, currencies and commodities trading at the bank in an interview on Tuesday.
The foreign lender had earlier forecast the currency at 90.50-91.00 levels.
U.S. President Donald Trump announced late on Monday that tariffs on Indian goods would be cut to 18% from 50%. The rupee surged 1.4% on Tuesday from near record lows to 90.2650, the biggest single day gain since December 2018.
On Wednesday, the rupee was trading at 90.46.
Uncertainty over the trade deal had been a key drag on the Indian currency, which weakened by 2% in January and hit a record low of 91.9875, as foreign investors sold a net amount of around $4 billion in the stock markets.
“Rupee was under pressure due to the outflows which we saw for the last month, and I think that should stop,” Jain said.Exporters could also start to increase their hedging ratios, which may further support the local currency, he said.
The sharp fall in the rupee, and expectations that it would weaken further, had prompted exporters to reduce their hedging activity and hold dollars overseas for longer, traders said.
Jain does not expect India’s central bank to aggressively accumulate foreign exchange reserves by buying dollars if foreign inflows return.
Also read: Rs 1.9 lakh crore SaaSpocalypse for IT stocks explained: What it means for investors
According to latest data, the Reserve Bank of India sold nearly $30 billion in the September-November period. Still, the country’s foreign exchange reserves hit a record high of $709 billion for the week ended January 23, lifted by a sharp rally in gold prices and the impact of multiple FX swaps.
“I do not think RBI will be buying aggressively at the current level. If the rupee stays around this level, the RBI might roll over their forward book and not intervene heavily,” Jain added.
