India: First shot fired to stem INR weakness underwhelms expectations – Nomura

Analysts at Nomura point put that in its first salvo against INR weakness, the Indian government has announced measures to encourage more capital inflows, its intention to curb “non-essential” imports, boost exports and reiterated its commitment to this year’s fiscal deficit target.

Key Quotes

“It estimates the capital inflow measures to have an impact of ~USD8bn-10bn.”

“We view the government’s guarded response as appropriate given that India’s macro fundamentals are in a much better shape today than in 2013, but given the build-up of expectations, the role of global push factors in driving capital inflows and continued global trade tensions, we believe the measures will likely underwhelm expectations.”

“Our two key takeaways from the announcement are: 1) the policy strategy for now is to finance the deficit without sacrificing growth; and 2) policymakers have moved from the first line (allow currency depreciation, FX intervention and positive comments) to the second line of currency defence (measures to boost capital inflows, cut imports and boost exports). Hence, we expect more measures in the weeks ahead.”

“Policy appears to be moving towards the second line of defence and hence the decision at the October policy meeting is a close call (we now assign a 55% probability to our base case of no change and 45% to a 25bp hike).”

“We expect no further tightening beyond that, as we believe slowing growth and recent currency weakness will moderate import growth in H2 FY19.”

“FX strategy: The risk is that USD/INR may trade through the 72 level and return to ~72.50 in the near term. A stronger USD and limited policy action could disappoint the market.

There remain many negative risks to INR – especially those that are global-led, but it is also clear that the government could step up actions if there is another round of significant INR depreciation/underperformance.”