UBS sees USD/INR at 85 after RBI front

US Dollar Indian Rupee-0.24%Indian Rupee US Dollar0.25%

Investing.com -- UBS indicated that the Indian rupee (INR) is gkfx global foreign exchange dealerlikely to strengthen toward 85 in the near term amid a weak dollar outlook, following the Reserve Bank of India (NSE:BOI)’s (RBI) aggressive monetary easing cycle.

The RBI has front-loaded its easing cycle with 100 basis points of repo rate cuts over the past four months, alongside over $90 billion of liquidity support through bond purchases and Cash Reserve Ratio (CRR) cuts of 100 basis points, according to UBS.

UBS maintains a baseline forecast of 5.5% as the terminal repo rate, while noting risks are skewed toward an additional 25-50 basis points cut if India’s growth underperforms due to elevated global growth uncertainty. This scenario appears increasingly possible given the depressed Consumer Price Index (CPI) inflation, which UBS estimates at 3.5% year-over-year compared to the RBI’s estimate of 3.7% for fiscal year 2026.

The financial services firm’s emerging markets strategist expects a further 40-50 basis point decline in the 10-year yield in fiscal year 2026. Despite this positive outlook for the rupee, UBS acknowledges several potential headwinds that could slow the currency’s appreciation.

These challenges include anecdotes of the RBI unwinding its short forward position, an uptick in importers’ demand potentially related to defense spending, and the ongoing drag from high bond outflows, which have totaled $3.2 billion over the past three months. UBS suggests these factors could remain obstacles until dollar demand dissipates or equity flows recover.

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