Citibank is predicting India’s rupee will hold much of the gains from what looks set to be its best month in two years.
The resolve shown by Prime Minister Narendra Modi in seeking to narrow the fiscal deficit to a nine-year low has boosted investor confidence and will probably support capital inflows, said Bhanu Vohra, Mumbai-based head of foreign exchange for South Asia at the US bank.
Citibank, part of the world’s largest currency trader Citigroup, sees the rupee holding in a range as investor appetite for developing-nation securities is pressured by the Federal Reserve’s policy tightening and yuan weakness.
“We expect this strength in the rupee to be range bound, with our medium term view of weak emerging-market currencies intact,” said Vohra, who sees a range of between 66-69 per dollar in the “medium term.” The rupee “can be an outperformer in Asia should the government execute the budget plans,” he said.
Developing-nation currencies are rebounding as a recovery in crude oil prices and the willingness of global central banks to support growth spurs risk appetite.
The rupee has jumped 2.4% this month to head for its biggest gain since March 2014, after weakening last month to the brink of a record low. Foreign funds have pumped a net $2.4bn into Indian stocks in March, after two months of outflows.
The rupee is still Asia’s worst-performing currency this year, having lost 1% to 66.8450 a dollar in Mumbai yesterday. It fell to 68.7875 on February 26, near a record low of 68.845 seen in August 2013. Morgan Stanley this month slashed its year-end rupee forecast to 73 from 70.
The Indian currency “is likely to underperform in a risk- averse environment that we expect will continue to dominate fundamentals over the next few quarters,” Morgan Stanley strategists led by London-based Hans Redeker wrote in a March 13 report.
Rupee “longs are crowded, and weakening risk appetite suggests that the equity-dominated capital inflows may ease from here.”
Two Federal Reserve officials on Monday said interest-rate increases may be warranted as soon as next month, citing solid readings on the US economy.
The Federal Open Market Committee next meets April 26-27. It held off from raising borrowing costs last week and halved projections for how many times it would hike rates this year to two.
The rupee’s “current rally is on the back of the FOMC turning more dovish than expected and a general risk-on sentiment returning to Asia, also led by the yuan appreciating,” Vohra said. “The rupee will remain between 66-69 to a dollar in the medium term. We don’t see it appreciating below 66 and or going to 72 either.”
Foreign holdings of rupee-denominated government and corporate bonds have climbed Rs44.8bn in the last five days, data from National Securities Depository Ltd show. That’s helped take net inflows to Rs17.2bn for this month, after withdrawals of Rs87.6bn in February, which were the biggest since April 2014.
Finance Minister Arun Jaitley on February 29 retained a target of narrowing the fiscal deficit to 3.5% of the gross domestic product in the year starting April 1. He boosted spending on a rural jobs programme, while budgeting for higher wages and military pensions.
UBS Group sees the rupee weakening to 70 a dollar by the year end, Bhanu Baweja, London-based head of emerging-market cross-asset strategy, predicted earlier in the month, citing the slump in India’s exports and risks the budget will reignite inflation.
Shipments from Asia’s third-largest economy fell 5.7% in February, a 15th straight month of contraction. The current-account deficit in the quarter through December was $7.1bn, wider than the median $3bn in a Bloomberg survey of economists, as overseas earnings from services slowed.
“The benefits of a weak currency on the exports of a country are obvious, but also at times overstated,” said Vohra of Citibank. “A very weak currency has other associated issues like being inflationary to start with. It also puts long-term investors at bay as their capital returns decline. India is no different.”