Rupee to remain resilient due to forex reserve build-up; inflation likely at 5%: CLSA

Indranil Sen Gupta, Economist & Head-Research, CLSA, believes that the Indian economy is fairly strong. He does not think there will be much damage on any of the parameters of the Indian economy. According to him, inflation could be at 5 percent even if oil is a pass through. He expects the consumer price index (CPI) to average at 4.7 percent.

Sen Gupta said, "I would argue that we should fit these geopolitical risks because I think the Indian economy is fairly strong to bear them. We do not think there will be much damage on any of the parameters of the Indian economy."

On inflation he said, "Looking at inflation, if there is $10 increase in oil prices, typically it takes up inflation by 40-50 basis points, average inflation for FY23, we think would be 4.7 percent so even if you allow full pass through, you are looking at inflation at 5 percent. We think inflation will cool off somewhere in the middle of the year, middle of 2022 and inflation will average around 4.7 percent next year, down from about 5 percent plus this year."

Further, he expects that rupee will likely remain resilient due to a massive build-up of forex reserves.

Sen Gupta said, “We do expect the rupee to remain resilient because of a massive build-up of forex reserves that Governor Das has done, after taking over at the RBI. So we think the rupee remains somewhere between 73 and 76.50, depending on seasonality, and on how the dollar behaves.”

As far as the US market is concerned, he feels the Federal Reserve is likely to raise rates six times. He says that the US dollar is pricing in not just the Fed rate hike cycle, but also tightening by other banks.

He said, “Our view is that the Fed will hike six times and while you have very high forex reserves to protect you against most of the global tensions, somewhere down the line if the Fed hikes 175 basis points, then the RBI will also have to move.”

On bonds, he believes India’s benchmark 10-year yield will hit 7.50 percent next year due to fairly large borrowings.

"We think that the 10-year should hit 7.50 percent next year – because the RBI will hike and also because you have a fairly large borrowing programme."