USD/INR: Barclays weighs on outlook

Barclays views the recent Indian rupee selloff as excessive, anticipating a near-term recovery given its substantial cheapening on both Nominal and Real Effective Exchange Rate bases, making it Asia's cheapest currency by 10-year average NEER deviations. While expecting foreign portfolio investment outflows to moderate and U.S. tariffs to have limited impact on India's growth, the bank projects a longer-term depreciation trend for the INR. The Reserve Bank of India is expected to intervene to prevent sharp declines, but also to cap significant gains by accumulating foreign exchange reserves.

Analysis

According to a research note from Barclays, the recent selloff in the Indian rupee (INR) is viewed as excessive, suggesting a potential for a near-term recovery. This assessment is supported by valuation metrics indicating the INR has cheapened substantially on both Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) bases, positioning it as the cheapest currency in Asia when measured against 10-year average NEER deviations. The bank anticipates a moderation in foreign portfolio investment outflows and minimal economic impact from U.S. tariffs, with domestic factors like GST rationalization expected to support consumer demand. However, this short-term outlook is tempered by a longer-term projection of continued depreciation. The Reserve Bank of India (RBI) is identified as a key actor, expected to intervene to prevent sharp, disorderly declines while also accumulating foreign exchange reserves during periods of INR strength, effectively creating a ceiling on potential gains and fostering a range-bound environment.

Key Decisions for Investors

• Given that the INR is now valued as Asia's cheapest currency on a 10-year NEER deviation basis, investors could consider the recent selloff an over-correction, presenting a tactical opportunity for a modest short-term recovery.
• Be aware that any significant INR appreciation is likely to be capped by the Reserve Bank of India's expected strategy of accumulating foreign exchange reserves, suggesting range-trading strategies may be more appropriate than holding long-term bullish positions.
• For strategic allocations, the underlying long-term depreciation trend identified by Barclays suggests that unhedged exposure to the INR remains a risk, warranting a review of currency hedging for India-domiciled assets.