The INR's sharp appreciation vis-a-vis the USD over the last few weeks has indeed taken market participants by surprise since the consensus was for stability and moderate depreciation going forward. Clearly both domestic factors i.e. the margin of the BJP's victory in Uttar Pradesh that carries with it the promise of a more empowered and confident central government pushing through critical reforms as well as global developments have played a role. On the global front, the US Fed's soft guidance and President Trump's inability to push the health care reform bill, his first important legislation as the president has led to the unwinding of the so-called Trump-trade (an aggressive long on the USD). This unwinding has lifted different asset classes including EMs that had got short shrift earlier.
We argue that the tepid intervention from the RBI is perhaps driven both by the abundance of INR liquidity that is potentially inflationary and its reassessment of the 'fair- value' of the INR. While some residual momentum could still be left in the INR, we see the likelihood of a turn in the trajectory as we go into the new fiscal year driven both by renewal of positive sentiment towards the USD and a more aggressive stance from the RBI. We believe that these are good levels for importers to think of hedging positions and on the flip-side exporters to wait awhile if they are able to.