The case for the Reserve Bank of India (RBI) to focus more on growth and less on inflation continues to strengthen, Commerzbank’s FX analyst Charlie Lay notes.

USD/INR can hold below 84.00 in the near term

“August inflation held below RBI’s mid-target of 4% for the second consecutive month at 3.7% yoy vs 3.6% in July. It has averaged 4.6% year-to-date, which is within RBI’s 2-6% target range. Core inflation, which strips out food and energy, also remained well-behaved. It was unchanged from July at 3.4% yoy in August. Year-to-date, it has moderated to 3.3%, down sharply from 5.1% in 2023, partly due to RBI’s restrictive stance.”

“Given that inflation is contained, signs of moderation in growth, albeit still relatively firm, and expectations of Fed rate cuts in the coming months, there is a case for RBI to consider shifting to a neutral stance. They could do so either in October or December. One other key determinant will be continued INR stability. INR has been the currency of stability in Asia this year.”

“In the first six months of the year, INR was down just 0.2% against the USD vs the average for Asian currencies of -4.2%. Since the end of June, Asian currencies have rallied sharply due to the weaker USD. They gained by 4.9% on average while INR is down 0.6% vs USD. INR has not experienced the sharp swings that the rest of the Asian currencies have, and this has been a deliberate policy from RBI. We could see this continuing and USD/INR could hold below the 84.00 level in the near term.”