USD to stay strong until next month: Morgan Stanley

The US dollar is expected to remain bullish until middle of next month, and equity and bond outflows from emerging markets are also likely to stay strong, says a Morgan Stanley report.

The global financial services major is "neutral" on rupee and forecasts rupee at 70.3 per US dollar in the third quarter of this year (July-September).

The rupee has been among the worst-performing currencies against the dollar compared with its peers so far this year and breached the 69-mark against the US dollar amid multiple headwinds, including global uncertainties and concerns over inflation.

The global brokerage further said that oil prices are expected to fall as global oil supply increases and this should provide a "tailwind for rupee and moderate the RBI's concern about inflation accelerating".

Besides, over the medium term, a rate hike by the Reserve Bank will ease inflationary pressure and support rupee valuations, the report noted.

"In the near term, as we expect US dollar to remain strong until mid-August and equity and bond outflows from emerging market to also stay strong," Morgan Stanley said in a research note and added that "we remain neutral on the rupee".

On Reserve Bank's policy stance, Morgan Stanley expects a rate hike at the August review meeting.

In June, the Reserve Bank of India had upped its retail inflation projection by 0.30 per cent and kept the policy stance in the neutral zone, even as it hiked the key rate by 0.25 per cent to 6.25 per cent.

The government has mandated the Reserve Bank to keep inflation at 4 per cent, with a margin of 2 per cent on either side.

The Monetary Policy Committee (MPC) will begin its three-day meeting on July 30 and announce its decision on the third bi-monthly policy of the current fiscal on August 1.