India: No reprieve for INR, awaiting policy response

USD-INR surged above the 68 level this morning due to the spike in oil prices on
heightened geopolitical risks surrounding Syria, sell-off in Indian equities, and
continued bearish sentiment. Asian countries running current account and fiscal
deficits such as India and Indonesia remain the hardest hit and given the structural
weaknesses, these currencies are likely to continue to underperform vs the rest of
Asia. The host of RBI policy measures in July provided a temporary reprieve for INR.
However, signs of policy inconsistencies and panic, after the 10Y bond yield shot up
towards 10%, led to a near 13% plunge in INR vs USD this month. USD-INR could
continue to overshoot to the upside but at the same time, risks of a stronger policy
response could constrain it near term. There are no quick fixes or magic wands but
the policy response will have to address the longer term structural issues in order to
calm investor fears.