BackRupee gains seen halting after Election
The rupee will retreat to a range between 60 and 62 before results of the vote are announced 16 May, predicts Yes Bank
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Mumbai: The biggest rally in India’s rupee since 2012 will halt as the winner of elections in the world’s largest democracy needs to build consensus for policies to revive the economy, according to the most-accurate forecaster.
The rupee, which rose 3.2% in the first quarter and touched an eight-month high of 59.60 per dollar on 2 April, will retreat to a range between 60 and 62 before results of the vote are announced 16 May, predicts Yes Bank Ltd, which had the closest estimates in the last four quarters in data compiled by Bloomberg. A new government that takes steps to improve external finances and economic growth would help boost it to 58 by March 2015, according to the Mumbai-based lender.
The winner of Indian elections that started this week, in which Prime Minister Manmohan Singh’s Congress party faces the main opposition Bharatiya Janata Party (BJP), must boost the pace of expansion from near a 2003 low and curb Asia’s fastest consumer inflation. Opinion polls show the BJP, which has pledged to rein in price pressures and spur investment, will emerge as the largest party while falling short of a parliamentary majority, as voters punish the ruling coalition for rising vegetable prices and graft scandals.
“Beyond the election, capital inflows will improve only if it’s a strong coalition," Shubhada Rao, chief economist in Mumbai at Yes Bank, said in an interview on 4 April. “If we have a weak coalition, then the rupee is likely to go through some short-term turbulence. It’s unlikely it will test its record low again because for that, one needs a combination of factors such as a weak coalition and drastically worsened fundamentals."
Rupee comeback
The rupee plunged to an all-time low of 68.845 per dollar in August as the prospect of US stimulus cuts fueled a capital flight from emerging markets. It has since rebounded 14.5%, the best performance among 78 global currencies tracked by Bloomberg, as policies aimed at containing inflation and the current-account deficit started showing results. Optimism that a BJP win at the polls will aid an economic recovery fueled the advance. The rupee slipped 0.1% to 60.125 per dollar on 7 April, before local markets shut on Tuesday for a holiday.
“The shortfall in the nation’s broadest measure of trade probably shrank to $35 billion in the year ended 31 March from an unprecedented $88 billion in the preceding period," finance minister P. Chidambaram said on 31 March in New Delhi. “Consumer-price inflation slowed to 8.1% in February, from as high as 11.2% in November, after the Reserve Bank of India raised interest rates three times since September."
‘Positive outcome’
Global investors, who pared holdings of rupee debt by an unprecedented $8 billion in 2013, have already plowed back $5.8 billion so far this year, according to exchange data.
Nomura Holdings Inc., the second-best forecaster, sees the rupee rising toward 58 per dollar as early as this quarter, before retreating to 59.5 by year-end.
“The market-perceived positive election outcome and expectations that this will lead to greater reform prospects will bolster the rupee this quarter," Craig Chan, Nomura’s Singapore-based head of currency strategy for Asia ex-Japan, said in an 7 April e-mail interview. With increased monetary- policy credibility and lower inflation, net capital inflows will finance the narrowed current-account deficit. “Rupee performance in the second half could be somewhat limited as the market focuses back on the reality of the still-subdued growth."
Asia’s third-largest economy, which expanded at a decade- low pace of 4.5% in the year through March 2013, is estimated by the government to have grown 4.9% in the 12 months that followed. Gross domestic product has gained an average 7.1% since 2001, official figures show.
Election bets
A decisive election victory for the BJP, which has Narendra Modi as its prime ministerial candidate, would be a catalyst for a long-term advance in the rupee toward 40 to 45 per dollar, Adam Gilmour, Citigroup Inc.’s head of Asia-Pacific currency and derivatives sales, said in a 12 March interview in Singapore. A weak coalition would be the worst-case outcome, he said, and might send the currency sliding beyond last year’s record low.
The BJP said in its campaign manifesto published 7 April that it would create a price stabilization fund and seek to rationalize interest rates for manufacturing. Modi’s party said it would look to set up a national agricultural market and take action against hoarders to bring down inflation.
“The policies laid out in the BJP’s manifesto appear both sound and prudent, and, if implemented, bode well for the economy," Nomura analysts Sonal Varma and Aman Mohunta wrote in a note after its release.
‘Darling of investors’
India’s widening yield advantage over developed-nation debt will add support to the rupee, according to FirstRand Ltd. Indian 10-year sovereign bonds yield 9.1%, 640 basis points more than similar-maturity US notes, the widest margin since December 2012.
“The rupee is a darling of investors at the moment because of its high carry," Paresh Nayar, the head of currency and money markets in Mumbai at FirstRand, said in a telephone interview on 7 April.
The interest-rate advantage may shrink as the prospect of an increase in US borrowing costs pushes up bond yields in the world’s largest economy, according to Credit Suisse Group AG, ranked third among rupee forecasters. The bank sees the Indian currency weakening to 62.5 per dollar in 12 months.
Fed effect
Federal Reserve chair Janet Yellen said last month the central bank may start to boost rates about six months after ending its asset-buying program. India’s current-account may deteriorate later this year due to seasonal factors, fueling some rupee weakness, according to Credit Suisse.
“The bank’s rupee forecast reflects our expectation for US yields to rise more significantly as we get into the summer and later this year," Ray Farris, Singapore-based global head of currency strategy at Credit Suisse, said in a 7 April telephone interview. “In India, in the second quarter of the year, there is generally some negative seasonality in the current account balance."
Canadian Imperial Bank of Commerce, which had the fifth most-accurate estimates for the rupee, sees the currency trading between 59 per dollar and 62 in the coming quarter.
The market has already priced in Modi winning with a majority, Patrick J Bennett, a Hong Kong-based strategist at Canadian Imperial Bank, said in a telephone interview on 7 April. In a lack of majority, we could see some modest weakness. But, as long as we see a change, the market will initially be encouraged. Bloomberg
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