The appreciation of the Indian rupee (INR) was warranted due to its undervaluation said Pranjul Bhandari, Chief India Economist/Strategist, ASEAN Economist at HSBC. In the conversation with Christina Titus & Mahesh Nayak, she stated that with rupee appreciation to 88 levels will see the RBI will gradually building its reserve and cutting its short position which would see the rupee depreciating to 90.
Excerpts:
The market rallied on the news of India-US trade deal. Is this an initial reaction or will the rally continue?
India is pushing through a wide slate of external‑facing reforms—from trade agreements with the EU, UK, Oman and New Zealand to lower customs duties, fewer non‑tariff barriers, greater FDI openness and a more flexible currency regime. India is now prioritising export growth as the centerpiece of its economic strategy. We’ve implemented several positive measures that are collectively driving significant progress. From this viewpoint, these steps bode well for medium-term growth across all asset classes, including equities, FX, and bonds.
How do you see the rupee going ahead ?
A lot of the correction has already happened and the currency has started to look undervalued.Some currency appreciation is warranted. We should eventually see the RBI working to rebuild its forex reserves or tries to pare its forward short positions, in which case then again we could go back to that gradual depreciation. Over time, our balance of payment (BOP) deficit should ease with stronger exports and an improving economy, providing more currency support. Overall, I am bullish on the rupee, and expecting it to hit around 88 before gradually depreciating near 90 by the year end.
Do you see FIIs coming into the market with the India-US trade deal announcement?
We must wait and watch. They wanted currency stabilisation first. If that happens over the next few days, investors will revisit opportunities over time.
Do you think dependency from the US will come down?
Diversification is something which every country is doing right now. India is also doing the same, and things are improving. Our trade relationship with the EU is a step towards diversification. India and EU together, they make up about 25% of global GDP, but the trade between them is only 0.6% of global trade. Bilateral linkages between these two large nations was very small. I think these are some of the things that India is trying to now focus on.
What’s your view on the current account deficit?
CAD has increased to over 1% of GDP, but it is not a very big increase. My general sense is that as long as it’s below 2.5% of GDP, it’s quite sustainable. The bigger worry has been capital inflows, which have not been sufficient. The FPI outflow from equity markets have been extremely high. However, I expect the flow situation to improve.
Any view on the equity markets?
A general sense is that across asset classes, India has underperformed the EM index over the last year. If corporate earnings improve, or the currency stabilises, equity markets could catch up. From that perspective, we remain positive on equities currently.
Are you seeing any other concerns which can derail this momentum?
One is the global environment. Global growth was extremely supportive last year despite all of the tariffs. This could start becoming unsupported. That’s one risk that we have to always keep in our minds. We are on the right track with key reforms, many still in the idea stage and needing full implementation plus complementary changes.