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The rupee has climbed almost 10.5% from a record low reached on 28 August as RBI raised benchmark interest rates twice. Photo: Pradeep Gaur/Mint
The rupee has climbed almost 10.5% from a record low reached on 28 August as RBI raised benchmark interest rates twice. Photo: Pradeep Gaur/Mint

Strategists boost rupee forecast on Raghuram Rajan policy

The rupee will end December at 62.50 per dollar, according to the median of 46 estimates in a 'Bloomberg' survey

Mumbai: Strategists raised their end-2013 forecasts for India’s rupee by the most in seven quarters as the current-account deficit shrank and central bank governor Raghuram Rajan acted to rein in inflation.

The currency will end December at 62.50 per dollar, according to the median of 46 estimates in a Bloomberg survey that included predictions from HSBC Holdings Plc and Credit Suisse Group AG. That’s 0.9% stronger than the projection as of 30 September and 0.3% weaker than 62.32 on Monday. Estimates for Indonesia’s rupiah were cut by 2.1% and those for South Korea’s won were raised 4.9%.

The rupee has climbed almost 10.5% from a record low reached on 28 August as the Reserve Bank of India (RBI) raised benchmark interest rates twice. Asia’s third-largest economy grew a faster-than-expected 4.8% in the September quarter and RBI predicts the shortfall in the broadest measure of trade will narrow 36% from a record. Goldman Sachs Group Inc. recommends buying Indian stocks, betting that the main opposition Bharatiya Janata Party (BJP) will form a new government that businesses favour next year.

“Fundamentally the rupee is in a better position than three or four months ago," Jonathan Cavenagh, a strategist at Westpac Banking Corp., said in a 28 November email. “Foreign investors have already dumped a lot of bonds, so its hard to see more significant outflows, while equity inflows are sticky because of optimism around the political outlook."

Overseas holdings

Global funds bought $17.5 billion more of Indian stocks than they sold this year through 28 November, exchange data show, and sold a net $8.9 billion of bonds amid speculation the Federal Reserve will pare its stimulus. Total overseas holdings of rupee-denominated bonds were about $24 billion, or about 29% of the $81 billion ceiling set by the government.

Westpac recommends buying the rupee and selling the Indonesian rupiah, Cavenagh said. The Australian bank raised its year-end forecast on India’s currency to 62.50 per dollar from 65.36 as of 30 September, according to the Bloomberg survey, while Credit Suisse revised its estimate to 61.33 from 63.04 and HSBC to 62 from 65.

The rupee rose 0.2% on Monday, paring its annual loss to 11.8%. The yield on the benchmark 10-year government bond was little changed at 8.74%.

Bank of America Merrill Lynch is bullish on the rupee as technical charts indicate the currency is set to advance to 58.98 per dollar and then to around 54, if it strengthens beyond 60.93.

‘Crucial juncture’

“We are at a crucial juncture for the rupee in the sense that we should start to strengthen very soon," MacNeil Curry, head of global technical strategy at BofAML in New York, said in a 30 November email.

While the current-account shortfall, which reached an unprecedented 4.8% of gross domestic product (GDP) in the 12 months ended March 2013, will stay below 3% of GDP in the fiscal years through March 2016, high inflation will limit the rupee’s appreciation potential, according to Goldman Sachs.

The gap narrowed to $5.2 billion in the three months to 30 September, RBI said in a statement on Monday. That’s the lowest since at least 2010.

RBI forecasts 5% GDP growth in the current fiscal year through March 2014 and considers a 5% inflation rate as sustainable. Goldman Sachs predicts India’s benchmark wholesale price index will rise 6.3% in the year through March 2015 and the pace of economic expansion will quicken to 5.5%.

‘Depreciating path’

“Higher inflation compared to trading partners may keep the rupee on a structurally depreciating path," Goldman analysts Tushar Poddar in Mumbai and Vishal Vaibhaw in Bangalore, wrote in a 28 November research report. “On balance, while we think the risks are slightly tilted towards the downside, there is considerably more hope for 2014 than 2013."

Goldman analysts including Hong Kong-based Timothy Moe on 5 November boosted the bank’s stance on Indian stocks to marketweight from underweight, saying equity investors tend to view the BJP as business-friendly.

Narendra Modi, the opposition group’s prime ministerial candidate in elections due by May 2014, has been praised by businessmen including Mukesh Ambani, India’s richest man, and Tata Group’s former chairman Ratan Tata.

Barclays Plc recommends buying dollars and selling rupees on dips in the exchange rate toward 61.60, Dhiren Sarin, the UK bank’s senior technical strategist in London, said in a 27 November email response. The risk is for a choppy ascent for the greenback toward 65 or 66 in the coming months, he said.

Currency reserves

FirstRand Ltd, South Africa’s second-biggest financial-services company, predicts the rupee will trade between 61.50 and 63 per dollar this month as an increase in the RBI’s currency reserves offsets concern about a potential paring of US stimulus. The Fed and RBI are both scheduled to review monetary policy on 18 December.

India’s foreign exchange holdings were $259 billion as of 22 November compared with $247 billion at the end of August, boosted by RBI’s offer of discounted swaps for dollars raised by banks. The window, which closed 30 November, attracted about $34 billion, RBI said in a statement on Monday. The central bank has also stopped direct supplies of dollars to oil refiners, the nation’s largest buyers of foreign currency.

“The swap windows closing has put some pressure on the exchange rate, but the measure has also helped RBI garner resources to defend the rupee if needed," Paresh Nayar, head of currency and money markets at FirstRand in Mumbai, said in a 29 November telephone interview. “The rupee is more resilient now."

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