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month (USTs only) and maintain a relatively dovish policy tone. The RBI’s policy backdrop is somewhat more complex. If the RBI only fine-tunes the existing liquidity framework and reiterates its intent to gradually exit the tight liquidity regime, then we expect a limited market response. The markets will then watch closely for signals from the new Raghuram Rajan on the timeline and possible preconditions for a roll-back of liquidity-tightening measures. However, an announcement that underscores the risks of the re-emerging inflationary pressures may disappoint the rates market. The market would then price in a prolonged period of tight liquidity and high short-term interest rates. Given elevated uncertainty surrounding potential monetary policy responses, we remain Neutral on GoISec duration.
We have a short-term Neutral FX rating on the INR. Heading into Q4, we expect the USD rally to pause on stabilising data from China and an improvement in Asia ex-Japan trade balances, boosting the Indian rupee. An improvement in India's trade deficit should also be supportive. However, the crucial FOMC outcome may lead to considerable US dollar volatility ahead of this. Also, in his 4 September speech, Raghuram Rajan mentioned the possibility of further FX stabilisation measures being announced in the monetary policy meeting. The absence of this could dent the Indian rupee optimism that has been visible since his appointment.
By Standard Chartered