Rupee to remain Asia’s best performer this year, says top forecaster

Mumbai: The top rupee forecaster sees the currency maintaining its position as Asia’s best performer after India allowed foreigners greater access to its debt.

“India remains one of the fastest-growing economies in the region,” said Roy Teo, Singapore-based senior foreign-exchange strategist at ABN Amro Bank NV, which had the most-accurate estimates in Bloomberg’s quarterly rankings. “The rupee has the potential to outperform other regional currencies this year on the back of higher inflows.”

The Federal Reserve’s decision not to raise US interest rates helped drive a region-beating 1.4% gain in the rupee in September as overseas holdings of local-currency notes climbed for two straight weeks. Teo sees inflows rising after the Reserve Bank of India (RBI) on 29 September unveiled a plan to raise the cap on foreign ownership of sovereign bonds in phases.

India’s relatively low exposure to China’s economic slowdown and a drop in oil costs has improved the finances of the region’s third-largest economy, which the Asian Development Bank predicts will grow 7.4% in 2015, compared with 6.8% for China. Exports to China comprise less than 10% of India’s total overseas shipments, the lowest ratio among major regional economies, according to Morgan Stanley.

ABN Amro predicts the rupee could rise to 65 a dollar by the end of October, 0.6% higher than its 65.4150 close on Tuesday. The lender forecasts the currency will retreat to 66 by end-December, Teo said, adding that the Indian central bank could step in to curb gains to shield exporters.

A Bloomberg index shows Indian sovereign bonds earned investors 7.6% in local-currency terms in 2015, the region’s top performance, as plunging Brent crude prices helped slow consumer inflation to a nine-month low in August. That’s prompted RBI governor Raghuram Rajan to cut the benchmark repurchase rate by 125 basis points, including a larger-than-estimated 50 basis point reduction on 29 September.

Global investors borrowing in dollars to purchase rupee assets earned 2.1% this year, the best carry-trade return in Asia, data compiled by Bloomberg show.

“The rupee is one of the bright spots in Asia right now and last week’s growth-oriented RBI policy is likely to further attract foreign portfolio inflows,” said Viraj Patel, a London- based currency strategist at ING Groep NV. “The decision on higher debt limits reinforces our view that medium-term fundamentals remain positive.”

ING, which stood fourth in the rupee forecasters’ ranking, sees the currency at 65.50 a dollar by year-end. The median estimate in a Bloomberg survey of analysts is 66.25.

India is in a “good position” compared with other emerging markets, Rajan said on 24 August, citing reasons such as moderating inflation, low short-term currency liabilities and a narrowing fiscal deficit.

The ceiling on foreign ownership of sovereign notes will be raised to 5% of the total amount outstanding by March 2018 in a move that will help attract Rs.1.2 trillion of additional investment, the RBI said. It’s at about 3.8% now, according to government estimates.

Overseas holdings of local-currency corporate and government securities rose Rs.1,700 crore in the two weeks through 2 October, the first back-to-back weekly increase since May, data from the National Securities Depository Ltd show.

“In a world of weak global demand and depressed growth, India offers a decent positive story for currency outperformance going forward,” said Nizam Idris, the Singapore-based head of foreign exchange and fixed-income strategy at Macquarie Bank Ltd. “The benign domestic inflation environment adds to the case for investment inflows into India.”

Macquarie, the third-best forecaster in Bloomberg’s rankings for emerging-Asia currencies, predicts the rupee to rise to 65.20 a dollar by end-October.