Rupee Forecasts Jump as Rally Shows Strategists Too Bearish
A vendor holds Indian rupee notes at his store in the Dadar wholesale flower market in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

Rupee Forecasts Jump as Rally Shows Strategists Too Bearish


(Bloomberg) -- Year-end forecasts for India’s rupee are rising at the fastest pace in 11 months after the currency’s rally this quarter took strategists by surprise.

The median estimate in a Bloomberg survey puts the rupee at 68 per dollar by the end of 2016. While that signals a decline of 1.5 percent from Monday, it is far less pessimistic than a prediction of 68.5 on Aug. 31. At least five global banks have raised rupee forecasts in September. The currency last week wiped out what looked set to be a third straight monthly gain -- a feat not seen since 2011 -- as the government denied a media report saying authorities planned to discuss a devaluation.

India is poised for its first current-account surplus since 2007, with the rupee’s 0.8 percent gain since the end of June putting the currency on course for its first advance in six quarters. Prime Minister Narendra Modi has lured investors to Asia’s third-largest economy by paving the way for a national sales tax that’s seen adding to government revenue and by ensuring a smooth transition at the central bank’s helm. Overseas funds have pumped the most money into stocks and bonds this quarter since March 2015.

Rupee Forecasts Jump as Rally Shows Strategists Too Bearish

“The rupee call was predicated on a sharper Federal Reserve tightening cycle and probably greater risk-off post-Brexit, but inflows have remained resilient as these two factors haven’t materialized,” said Viraj Patel, London-based foreign-exchange strategist at ING Groep NV, which has raised its end-2016 estimate to 68 per dollar from 69. “The outlook for India bodes well given the strong growth dynamics as well as the material reduction in external vulnerabilities. Certainly, calls for 70 by year-end seemed a bit excessive.”

The Indian currency is down 1.2 percent this year in Asia’s worst performance after the Philippine peso and Chinese yuan. HSBC Holdings Plc this month predicted it will end 2016 at 66 per dollar, stronger than its earlier estimate of 69. Barclays Plc raised its forecast to 68.50 from 73.50, Standard Chartered Plc changed its call to 66.25 from 68, while Macquarie Bank Ltd. has revised its prediction to 68 from 70.

‘Attractive Carry’

Borrowing in dollars to purchase rupee assets earned 0.6 percent in the past month, the highest such returns in Asia, data compiled by Bloomberg show. Foreign investors have bought Indian stocks worth $3.4 billion this quarter. Their holdings of rupee-denominated corporate and government debt are up by 99.4 billion rupees ($1.5 billion) since the end of June, poised for the biggest increase in six quarters. Indian sovereign bonds offer the highest 10-year yields among major Asian markets after Indonesia.

The rupee was little changed Monday at 66.9675 per dollar, according to prices from local banks compiled by Bloomberg. A measure of the currency’s one-month implied volatility, used to price options, fell six basis points to 5.78 percent and slumped 215 basis points since a 10-month high reached in June.

“When you consider the rupee’s relatively low volatility, attractive yields and improving fundamentals, it appears to be one of the most attractive carry currencies on a risk-adjusted basis,” HSBC strategists wrote in a research note. “The recent passing of GST bill by parliament has ignited another round of optimism on reform.”

Rupee upgrades come after Indian lawmakers last month approved a goods-and-services tax, which Finance Minister Arun Jaitley has said will add as much as 2 percentage points to economic growth that is already the fastest among the world’s major countries. Dollar-based investors stand to gain 7.4 percent, including interest, on rupee purchases by the end of 2017, the highest total returns in Asia after Indonesia, Bloomberg data show.

Even so, an impending increase in U.S. interest rates, weak global demand that has seen India’s exports slide in all but one of the previous 21 months and the central bank’s dollar purchases to build foreign-exchange reserves are seen as factors weakening the currency toward the end of the year.

‘Good Case’

GAM International Management Ltd.’s Caroline Gorman said a “slightly weaker” U.S. dollar environment and the removal of the uncertainty surrounding the replacement of Raghuram Rajan -- who was succeeded by his deputy Urjit Patel as the new Reserve Bank of India Governor this month -- has supported recent gains in the rupee.

“Strong growth, moderating inflation and an improving current account all play positive for the rupee,” said Gorman, a London-based investment manager at GAM. “Given this in combination with my expectation that rupee outperforms the broader emerging-market foreign-exchange space in general ‘risk off’ conditions, I think there is a good case for being long the rupee going forward.”

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