India’s rupee will rise 2.5 % in 2007 to the highest in more than eight years against the dollar as the world’s second-fastest growing major economy attracts money from overseas, said HSBC Holdings Plc.
Foreign direct investment will exceed funds flowing into Indian stocks from abroad, protecting the rupee’s gains from swings in the equity market, said Richard Yetsenga, HSBC’s Hong Kong-based currency strategist. Demand for the rupee will prevent the country’s current-account deficit from widening, he said.
“Even if we see a significant correction in stocks, we doubt that the rupee will react as poorly as many think,” said Yetsenga in an interview yesterday. “The deficit is funded by a much broader range of capital flows than just equity.” The rupee will reach 44 per dollar by the end of March and 43 per dollar by year-end, Yetsenga forecasts. The last time the currency traded that high was June 1999 as the region emerged from the Asian financial crisis. It was 44.101 at 10:35 a.m. in Mumbai, a one-year high.
India’s currency is among the top-10 performers in the world so far this year as the country’s advisory panel to the government predicts foreign direct investment to almost double to $9 billion for the year that ends March 31, exceeding stock purchases for the first time in “several years.”The gap in the nation’s current-account, a broad measure of trade that includes services, tourism flows, employee remittances and investment income, widened to $11.7 billion in the six months through 30 September, from $7.2 billion in 2006. The forwards market, where investors can hedge their currency risk, shows the rupee will weaken to 45.44 in 12 months, contrary to HSBC’s forecast. Forwards are agreements in which assets are bought and sold at current prices for future delivery.
Investment by foreign companies such as Sony Ericsson Mobile Communications Ltd. and Korea’s Posco may help support India’s $854 billion economy. The expansion is forecast at about 9 % this fiscal year, according to the central bank, after growing an average 8.3 %in the previous three years, unprecedented since independence in 1947. That ranks the country second only to China, whose economy grew 10.7 % last year.The rupee will benefit little from India’s credit rating upgrade this week from Standard & Poor’s because the government still restricts the amount that foreigners can invest in the nation’s debt, said HSBC. S&P on 30 January raised the ratings to BBB, the lowest investment grade, for the first time in 14 years.“This story is an attractive headline, but means little” for the rupee, Yetsenga wrote in a note to clients on 30 January. For global asset managers “market access will still be constrained by local controls. The credit rating has not really been the constraint.”
Gains in the rupee were curtailed at 1.8 % last year as the government limited debt investment by foreigners to avoid the potential for panic selling that can cause volatility in bond yields and the currency. The rupee has risen against the dollar for four of the past five years, according to agencies.“Sovereign credit ratings tend to be used in fixed-income mandates, they are rarely used to formally guide equity managers,” Yetsenga said.India’s currency market is all but closed to foreign investors. They will be allowed to own $3.2 billion in government bonds by March 31, 1.5 % of the 9.5 trillion rupee ($215 billion) of debt outstanding, compared with $2.6 billion now.The currency advanced six straight months through January as India’s benchmark Bombay Stock Exchange Sensitive Index, or Sensex, completed eight months of gains. The rupee benefited from $8 billion of net equity purchases by overseas investors in 2006, following a record $10.7 billion the previous year.
India’s Sensex is trading about 26 times its future earnings compared with Morgan Stanley Capital International Ltd.’s Emerging Market Index, which is valued about 16 times future earnings. Higher valuations for Indian stocks have spurred speculation of a correction. Korea’s Posco is planning to build a $12 billion steel factory in the Indian eastern state of Orissa, while rival Arcelor Mittal, the world’s third-biggest steelmaker, in December agreed to build a $9 billion plant in the same province. Sony Ericsson this week said it’ll set up a factory with a capacity to make 10 million phones by 2009 in the southern city of Chennai, without disclosing how much it plans to invest. “We remain bullish on the rupee,” said Yetsenga, who recommends selling the dollar against the Indian currency.