INR: HSBC On INR Drivers & Outlook

The global bank weighs in on recent USD/INR price action. It maintains its recent downward revision to end year USD/INR forecasts.  

HSBC: "There has probably been an abrupt unwinding of long INR positions, triggered by negative headlines on geopolitical tensions between India and Pakistan. A Reuters positioning poll suggested that market participants turned short USD-INR in mid-April. As of 1 May, survey respondents ranked the INR as their fourth pick in Asia to go long, after PHP, SGD and THB. Moreover, before geopolitical headlines surfaced, on 6 May, USD-INR risk reversals fell to their lowest since September 2024.

Up until very recently, the market was positive on the INR because of sharply lower oil prices since early April, and because the US administration has been emphasizing that it is prioritizing India in trade talks, with the Vice President even visiting (Bloomberg, 21 April). India has been getting equity inflows from foreign investors since mid-April, breaking a streak of relentless equity outflows totaling nearly USD30bn during the 6-7 months prior. The USD5.5bn of equity inflows over the past four weeks offset modest bond outflows (USD700m) during the same time. HSBC Equity Strategy thinks GEM investors are already very underweight Indian equities, although they acknowledge that there could still be some earnings downgrades and valuations are still high.

In our view, the boon from lower oil prices is important. It will contain India’s trade deficit and inflation. Coupled with the rise of the EUR – which is an important component of the trade-weighted INR basket – since March, we think the challenge that the INR faced earlier in the year from REER overvaluation and twin deficits has passed. This suggests less upside for USD-INR compared to before. We have therefore lowered our USD-INR forecast for year-end from 88 to 86 in the recent EM Roadmap (30 April)."