Investing in rupees will earn 9.2% including interest

HSBC Holdings Plc and Australia and New Zealand Banking Group Ltd (ANZ) recommend buying India’s rupee for the best returns in Asia when the US raises borrowing costs. Investing in rupees will earn 9.2%, including interest, by the end of 2015, according to analysts’ forecasts compiled by Bloomberg. That’s more than the 5.4% on Indonesia’s rupiah and 2.5% for China’s yuan. Among 23 emerging-market currencies, only Russia’s ruble and Brazil’s real are seen offering higher returns against the US dollar. The rupee has remained steady even as South Korea’s won fell the most among developing economies after the Federal Reserve last week ended its stimulus programme and signaled it’s on course to raise interest rates next year.

Global funds have poured $36.5 billion into Indian debt and stocks in 2014, betting on faster growth as Prime Minister Narendra Modi eases investment rules. “The rupee will outperform most emerging-market currencies,” Khoon Goh, a senior foreign-exchange strategist at ANZ in Singapore, said in an 30 October phone interview. “Under the Modi government, the prospect of economic reforms will continue to make India an attractive destination for foreign investors.” The Indian currency handed investors a total return of 8.45% this year through 3 November, second only to the 8.53% gain on Argentina’s peso among developing nations, data compiled by Bloomberg show. In the spot market, the rupee’s 0.7% advance is the best among emerging markets in 2014, while the Bloomberg Dollar Spot Index has climbed 6.5%. Rupee forecasts ANZ and HSBC predict the rupee will weaken to 62.50 per dollar by the end-2015 from 61.3575 as of 9:51am in Mumbai. Nomura Holdings Inc. expects it to strengthen to 59.50 in the same period. ANZ recommends selling euros to buy rupees to fund purchases of higher yielding Indian assets in so-called carry trades. Westpac Banking Corp., favors funding in Singapore dollars. “While we see the rupee weakening through 2015, it will likely outperform many other emerging-market currencies in an environment where the dollar’s bull-run continues,” Paul Mackel, HSBC’s Hong Kong-based head of Asian currency research, said in an 31 October e-mail interview.

“A broad assessment of the improvements in India’s fundamentals and the potential for more reforms to come through would suggest there is medium-term value in being long the rupee.” The rupee has surged about 12% from an unprecedented low reached in August last year as three interest-rate increases by Reserve Bank of India (RBI) governor Raghuram Rajan helped cool inflation, curbs on gold imports narrowed the current-account deficit and foreign reserves reached an all-time high. S&P outlook Standard and Poor’s boosted its outlook for India’s credit rating 26 September, citing reduced price pressures and the government’s plan to narrow its budget deficit to a seven-year low of 4.1% of gross domestic product (GDP). Consumer-price gains have decelerated to 6.46% in September, the slowest since the index was created in January 2012. “The rupee will be less impacted next year when US raises rates as concerns about the current-account deficit have been addressed, and India has built foreign-exchange reserves to counter any market volatility,” ANZ’s Goh said. “Rajan has raised rates, and it’s quite attractive to invest in India.” India’s currency stockpile rose to $314 billion as of 24 October, from $275 billion in August last year, after reaching a near record $321 billion in July. A 25% drop in Brent crude prices since June will help reduce the current-account gap to 1.5% of the GDP in the year ending March 2015, compared with an earlier estimate of 2.1%, according to HSBC.

Bond rally Government bonds rallied in October on optimism cheaper oil will slow inflation and allow the central bank to cut interest rates. The yield on the 10-year yield fell five basis points, or 0.05 percentage points, today to a 13-month low of 8.21%. It has dropped 62 basis points in 2014. The central bank could consider lowering rates as early as March should lower energy costs help ease inflation further, RBI adviser Ashima Goyal said in an 20 October interview. While lower crude prices are good for narrowing deficits in a nation that imports almost 80% of oil, inflation remains the highest among major Asian economies. The shortfall in India’s current account, the broadest measure of trade, is likely to widen on the back of faster economic growth, hurting the rupee, according to Credit Agricole CIB, which predicts an 8.3% decline to 67 per dollar by the end of 2015. Rupee risks “The current-account deficit will be widening as gold imports increase, and as the economy grows at a faster pace India will be importing more,” Dariusz Kowalczyk, a Hong Kong- based strategist at Credit Agricole, said by e-mail. “Inflation is down but it’s still significantly higher compared to other countries.” While India is “much better” placed than a year ago to withstand large outflows, it still faces risks from relatively high inflation and a potential slowdown of capital invested in emerging markets, RBI’s deputy governor H.R. Khan said in an 4 October speech.

One-month implied volatility, a measure of exchange-rate swings used to price options, has slumped 397 basis points this year, to 6.23%. Investors who borrowed US dollars, euros and Singapore dollars to bet on appreciation in the rupee earned the best returns after the Argentine peso in carry trades among 44 global currencies tracked by Bloomberg. “Growing structural positives have helped keep the rupee volatility low, which makes the rupee attractive in carry terms,” Morgan Stanley strategists led by Geoffrey Kendrick, head of Asian currency and interest-rate strategy in Hong Kong, wrote in an 31 October research note.


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