The INR traded between 75-76.40 in June despite reduced oil imports and foreign investments in Reliance Jio. The RBI aggressively bought USD during the lockdown, increasing reserves over $500 billion for the first time and engineering a controlled devaluation of the INR. Imports and exports have both declined drastically, resulting in a small current account surplus for Q1. The INR outlook is 75-76.50 due to risks from US economic troubles and the China border crisis, but a broader USD decline could strengthen the INR in the long run.

1. INR Outlook July 2020
The rupee moved between a 75.00 and 76.40 in a sideways band through June. Any
expectations of INR strength in the wake of a drastically reduced oil consumption month
and periodic announcements by Reliance Jio of further stake sales to overseas investors was
belied by a stubbornly propped up USD.
The expectation is that this quarter will be the first in many years where the Current
Account end up in a surplus. Even with reduced repatriation flows from the Middle East and
a collapse in exports the fall in imports has been great enough to nearly put external trade
into balance. This, plus the USD 13 billion that the Ambanis have managed to offload in the
Jio venture within the space of a month would have strongly seen a fall in the USD/INR pair
in a normally functioning liquid foreign exchange market. In fact, in normal times, a move to
71/72 would have not been quite likely. So, the lack of any drop in the value of the USD in
truncated markets (now currently operating from 10am-2pm daily versus 9am to 5pm under
normal circumstances) where volumes have dropped considerably along with trade flows it
came as a surprise when the INR failed to appreciate.
Graph 1: USD/INR January – June 2020
Source: Investing.com
The answer came with the announcement of the surprising surge in RBI foreign exchange
reserves over the May-June period. When it was made public in mid-June the foreign
exchange reserves had surged by over USD 11 billion in 2 weeks- roughly equivalent to the
amount that had been committed up that point by overseas investors into the issue. It
became clear to all that the inflow had bypassed the market completely and gone straight
into the RBI’s holdings.
A look at the chart below confirms that the rise of FX reserves above USD 500 billion for the
first time ever was due to exchanging INR for USD rather than a revaluation gain.

2. Graph 2: RBI Intervention
The other interesting thing to note is the USD 30 billion rise in reserves since the low in
March. It isn’t just the Jio inflow that is adding to the reserves. There is a sense- looking at
the movement of the INR and overlaying the growth in reserves, that the RBI has
engineered this devaluation by buying actively and aggressively into the period of the
lockdown. This could have been a proactive measure to offset a perceived loss of
competitiveness: to use the crisis to correct a rupee overvaluation according to the RBI
model.
The lockdown has meant that exports are down drastically. But so are imports. Indeed, it
was just announced that the Q1 (April-June 2020) Current Account Balance was actually in a
marginal surplus of USD 600 million. Since India is in an almost permanent state of running a
CAD (current account deficit) it has its own ready acronym. Oil consumption is down- a
major component of our import bills but so is a host of other categories. The upshot is that
the rupee liquidity (INR 5.8 trillion sitting with banks) is finding its way into the GOI bond
market which will help finance the expansionary fiscal policy required to kickstart the
economy again. It is unlikely that the current account will remain in surplus and we may
head back into a deficit by the next quarter itself. However, if it was ramped up RBI
intervention that brought us to the mid 75s then a market without RBI support may bring
about a stronger INR.
There is still too much in flux at the moment: the lack of a clear path vis-à-vis India’s trade
and investment policies with China, not to mention the border crisis brewing with them;
the health situation in the US- our largest trading partner by a whisker with who we run a
trading surplus of USD 19 billion (2018-19) may affect our trade numbers if the situation
deteriorates. Given all this I would hazard ada range of 75.00-76.50 this month ahead. The
upside USD risk represents the high sense of ‘risk-off’ in the market. FIIs are still wary of the
potential for things to go wrong, financially (with the fiscal projections decidedly on a knife-

3. edge of acceptability/ unacceptability), health-wise and politically (the stand-off with China
and possibly Pakistan now).
The downside risk is something that may be a bit more remote but is looming ever larger as
we near the year end: a broader collapse of the US Dollar. There seems an inevitability that
the US may face a long-term fall in the value of their currency for a host of reasons. The
huge oversupply arising out of a massive Federal Reserve balance sheet expansion, the
political turmoil emanating from a chaotic- and possibly criminally negligent, Executive
branch which may lead to disputed election results in November and the failure to tackle
the Covid-19 virus sensibly will all weigh on the performance of the USD. The Fed has
created a market dependency on its bloated balance sheet, the societal fractures that have
erupted will not heal overnight and the lessons from this presidency for the rest of the
world will be not to place such faith in the consistency of American policy going forward- no
matter who ascends the seat. We can see it in the newly aggressive behaviour of the
Chinese and the steady solidarity of the Europeans in the face of American isolationism.
These factors suggest a longer-term dollar decline as it struggles on many fronts to emerge
from the self-inflicted crises it faces.
On an academic note the chart below shows the behaviour of the INR against the USD from
the time of freeing up the currency in 1991. We can see decadal trends where 1991-2002
we saw the INR depreciate, 2002-2011 where it remained in a broad sideways band and
then 2012-the present where we see INR again depreciating. Although it is too early to tell,
we may be near an inflexion point where INR weakening may not be the certainty it has
been over the last 8 years- especially with the possibility of a broader USD decline.
Graph 3: USD/INR 1991 to the Present
Source: Investing.com
Bonne Chance.