A man holds a two thousand Indian rupee banknote (Photographer: Dhiraj Singh/Bloomberg)

Asia's Worst Currency to Stabilize, Help India Bonds, Kotak Says

(Bloomberg) -- India’s rupee, Asia’s worst-performing currency this year, has scared many foreign fund managers away from the nation’s local bond market.

Over the next several years, however, the rupee will stabilize, attracting international investors back to the country’s debt market, according to one of India’s leading life insurance companies.

The nation’s currency has dropped about 7.3 percent against the dollar this year. That’s part of a correction after it strengthened in the past five years to overvalued levels, Kunal Shah, senior vice president and fund manager of debt and alternate assets at Kotak Mahindra Life Insurance Co., said in a phone interview. The recent weakening has left the currency less vulnerable as it’s no longer as overvalued in real effective exchange rate terms, he said.

Outflows from India’s bond market total $6.1 billion year to date, according to Bloomberg-compiled data. The exodus came as India’s current account deficit weighed on the rupee. Higher oil prices have taken a toll, as India is the world’s third-biggest oil consumer and relies on imports to meet about two-thirds of its fuel needs.

Brent oil, the global benchmark, is at about $77 a barrel. If crude prices don’t go beyond $80, then the rupee will stabilize against the dollar and attract more foreign players to the bond market, Shah said.

It just might not happen right away, as political risks stemming from India’s general elections next year will likely keep the rupee volatile until then, he added.

©2018 Bloomberg L.P.

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