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India’s Rupee Faces Further Weakness As Demonetisation Trumps GDP

India’s Rupee Faces Further Weakness As Demonetisation Trumps GDP

Oliver Morrison, Analyst

Talking Points

Indian third-quarter GDP print misses estimates but still grows 7.3% year-over-year

Rupee under pressure from government’s ‘Demonetisation’ move and Trump win

• Reserve Bank of India under pressure to announce a further 0.25% rate cut next week

See the DailyFX Analysts' 4Q forecasts for Crude Oil, the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

Indian GDP rose 7.3% year-on-year in the third quarter, up from 7.1% in the previous quarter, according to official figures released Wednesday. That’s below the 8% expected by analysts. An interest rate hike is a growing in possibility when the central bank meets next week – particularly in light of the government’s demonetization measures which are likely to curb consumer spending and crimp GDP growth further.

At the beginning of this month, the Indian government announced a shock move to pull 86% of the country’s currency out of circulation in an attempt to combat corruption, back money and terrorism. Prime Minister Narendra Modi banned all 500 and 1,000 Rupee notes in the country, of which there were around 18 billion [notional?].

That decision heaped further pressure on the Indian Rupee, which like many emerging market currencies is suffering from the prospect of next month’s Fed rate hike sucking money away from emerging markets.

The Rupee hit a new 39-month low on Monday versus the Dollar when USD/INR hit a high of 68.4700, although it’s since retreated to trade at 68.3800. It was trading at around 66.5 before the Trump win.

India’s new central bank Governor Urjit Patel is now under pressure to announce further easing when the Reserve Bank of India meets next week on December 6 and 7. In October the bank cut its benchmark repo rate to 6.25% from 6.50% – the lowest level for nearly six years – in an effort to boost the economy.

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