USD/INR continues to hold around the 83.00 level and within the 82.50-83.50 range of the past four months. Economists at Commerzbank analyze the pair’s outlook after the latest inflation figures from India.

Welcome development on inflation

January headline inflation eased to a three-month low of 5.1% YoY Core inflation, which excludes food and energy, moderated further to 3.6% from 3.9% previously. This is encouraging as it suggests RBI’s tight policy stance is helping to keep inflationary pressures in check despite the strong demand backdrop.

RBI has stated that it desires to see inflation return towards 4%, the mid-point of the 2-6% target. As such, RBI is expected to maintain a hawkish stance near term. We don’t envisage them cutting rates ahead of the Fed. This in turn should also help to support INR.