The rupee will earn 8.3%, including interest, by mid-2016, the best total return in the region, according to Bloomberg surveys of strategists.

Bloomberg/Mumbai


The top rupee forecaster says the currency will outperform Asian peers as India is less exposed to China and even benefits from plunging commodity prices.
The rupee will earn 8.3%, including interest, by mid-2016, the best total return in the region, according to Bloomberg surveys of strategists. Rupee forecasts have fallen the least among Morgan Stanley’s so-called Fragile Five currencies since China’s surprise move to devalue the yuan on August 11 roiled global markets.
Exports to China comprise less than 10% of India’s total overseas shipments, the lowest ratio among major regional economies, according to Morgan Stanley. The past year’s 57% slide in Brent crude prices has helped ease consumer inflation and narrow the net oil-importing country’s current- account deficit, burnishing the rupee’s appeal for global funds ahead of the potential increase in US interest rates.
“The rupee’s direct trade exposure to China is minimal compared to the East Asian economies and it is currently benefiting from the subdued oil-price environment,” said Viraj Patel, a London-based currency strategist at ING Groep, the top rupee forecaster in Bloomberg’s quarterly rankings. “It will outperform its commodity-exporting emerging-market peers.”
China’s decision to devalue its currency and the prospect of an increase in borrowing costs by the Federal Reserve has sparked a selloff across developing markets this month.
India runs a $42bn trade deficit with China, data compiled by Bloomberg show. A weaker yuan benefits Asia’s third- largest economy, a net importer of Chinese goods, according to Sue Trinh, head of Asia foreign exchange strategy at Royal Bank of Canada in Hong Kong.
Year-end rupee forecasts have been cut 0.8% since China’s move, compared with reductions of between 1.5% and 4% for South Africa’s rand, Indonesia’s rupiah, the Turkish lira and Brazil’s real. Morgan Stanley dubbed these currencies the Fragile Five in 2013 because of financial shortcomings as Fed tightening loomed.
“The impact of yuan devaluation on the rupee will be less compared to other Asian currencies such as the South Korean won, Taiwan dollar and the Singapore dollar,” said Roy Teo, a Singapore-based currency strategist at ABN Amro Bank. “The rupee will weaken less.” Shipments to China are between 10 to 20% of total exports for Indonesia, Malaysia and Thailand, according to Morgan Stanley. The ratio for Taiwan, Korea and Singapore is about 40%, 30% and 25%, respectively.
The rupee weakened beyond 66 per dollar yesterday for the first time since September 2013. That’s revived memories of August 2013 when it sank to an unprecedented 68.845 after the Fed’s signal to end bond purchases. It has since rebounded 3.6%, the region’s best performance in the period, as policy makers’ curbs on gold imports and cheaper oil reduced the current-account gap.
Investor optimism also stems from Reserve Bank of India Governor Raghuram Rajan’s success in curbing currency swings and accumulating foreign-exchange reserves, which provide a cushion to fight global shocks.
The shortfall in the broadest measure of trade narrowed to a seven-year low of $27.5bn in the year ended March 31. Reserves rose to a record $355bn in June.
“The rupee remains relatively more shielded in the current setting due to the global commodity market trend plus a more credible central bank,” said Ju Wang, a senior currency strategist at HSBC Holdings in Hong Kong. “It is likely to be a regional outperformer on a total return basis.” Rupee investors earned 0.8%, including interest, this year through Friday, the best returns in Asia, according to data compiled by Bloomberg. ING forecasts the currency to end the year at 65.50 per dollar.
India is in a “good position” compared with other emerging markets due to strengthening economic growth, moderating inflation, low short-term currency liabilities and a narrowing fiscal deficit, Governor Rajan said in Mumbai Monday.
The central bank will use its reserves to stem rupee volatility as stocks and currencies fall around the globe, he said.
Indian sovereign bonds have returned 13% in the past year, the region’s best performance, according to indexes compiled by Bloomberg.
Global funds have sold a net $260mn of local stocks this month, compared with withdrawals of $2.03bn from South Korea, $1.23bn from Taiwan and $597mn from Indonesia, data compiled by Bloomberg show.
Local equities have attracted $622mn this quarter, the only inflows among eight Asian markets tracked by Bloomberg.
“The slump in commodity prices, especially oil, has helped wipe out the vulnerabilities that India faced in 2013 post the taper tantrum,” said ABN Amro’s Teo.