Commerzbank analysts report that USD/INR was little changed near 96.57 on Friday but has edged higher since early July, largely reflecting renewed upward pressure from Oil prices. They argue that the recent pullback in Oil should ease some strain on the Rupee. Reserve Bank of India (RBI) measures to attract foreign inflows via FCNR(B), ECB and OFCB schemes are gaining traction and could draw up to USD80 billion by year-end.

Tariffs and flows shape Rupee outlook

"Overall, the July flash PMIs suggest that the moderation in economic activity is deepening, led by softer domestic demand and renewed cost pressures. Manufacturing is the more resilient sector, supported by stronger external demand as firms build inventory buffers amid heightened global uncertainty."

"In contrast, service providers are facing rising competitive pressures and weaker demand conditions. Looking ahead, renewed Middle East tensions pose a downside risk through higher energy costs and potential supply-chain disruptions, while the pickup in price pressures could complicate the Reserve Bank of India's (RBI) wait-and-see stance."

"On trade policy, the US imposed a new 10% tariff on imports from India following findings related to forced labour in supply chains. The tariff took effect on 24 July, replacing the temporary 10% levy introduced under Section 122 that expired that day."

"Measures introduced by the Reserve Bank of India (RBI) to attract foreign inflows appear to be gaining traction, with domestic banks reporting USD20.7bn in FCNR(B) deposits, external commercial borrowings (ECB) and overseas foreign currency borrowings (OFCB) as of 17 July. These measures are estimated to attract up to USD80bn by year-end. The FCNR(B) facility will close on 30 September, while the ECB and OFCB schemes will expire on 31 December."

"India's Commerce Ministry stated that 45% of goods, such as electronics and pharmaceutical products, will be exempt from the new tariff. It also noted that negotiations with the US on a bilateral trade agreement are ongoing, and it aims to reach an early conclusion."

"In FX, USD/INR was little changed at around 96.57 last Friday but rose 0.3% over the week. The pair has trended higher since early July, largely reflecting renewed upward pressure on oil prices. The pullback in oil prices should also help relief some pressure on INR."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)