Hong Kong/Mumbai: India’s rupee, falling along with the rest of emerging-market currencies as crude oil slides, is poised to advance in 2015 owing to the nation’s status as a net importer.

That’s the view of Goldman Sachs Group Inc. and HSBC Holdings Plc, which say investors will start differentiating between the winners and losers from cheaper oil. The rupee will strengthen to 62.7 per dollar by the end of next year, the median estimate of 34 analysts surveyed by Bloomberg shows, from 63.29 on Tuesday and a 13-month low of 63.89 reached last week.

“India is the major beneficiary of lower oil prices," Ju Wang, HSBC’s strategist in Hong Kong, said on 18 December by e-mail. “The rupee will fare better than most."

Brent crude’s 46% decline since mid-year has contributed to the rupee’s 2.4% drop this year. The currency is down more than 30% since the end of 2010. A Bloomberg index of 20 major developing-nation currencies is headed for a sixth straight monthly decline and sank this month to its lowest level since 2002.

While the rupee is usually one of the “prime beneficiaries of lower oil prices," it’s being weighed down by a “generalized shock" across emerging-market currencies, Kamakshya Trivedi and Themistoklis Fiotakis, strategists at Goldman Sachs in New York, wrote in a 22 December client note. There’s room for it to recover, they wrote.

The Reserve Bank of India (RBI) intervened in foreign-exchange markets last week by selling dollars to prop up the rupee, according to three Mumbai-based traders who spoke on condition of anonymity.

Next year, strategists predict, it will all be different. With India importing about 80% of its oil needs, the decline in crude prices should allow the government to reduce the deficit in its current account, the broadest measure of trade, and attract more investors to the country.

Brent crude

Brent crude futures fell below $60 a barrel this month for the first time since 2009 amid concerns about oversupply. A price below $70 will eventually almost erase India’s deficit, which totalled $10.1 billion in the third quarter, compared with a record $88.2 billion in the 12 months ended March 2013, UBS Group AG predicts.

Economic reforms by Prime Minister Narendra Modi and the benchmark interest rate of 8% will also attract foreigners to rupee-denominated assets, according to Nomura Holdings Inc. The rate compares with a maximum 0.25% in the US and Japan.

The rupee “still looks like it will be an outperformer in Asia and especially amongst other global high-yielders," Craig Chan, Nomura’s Singapore-based head of foreign-exchange strategy for Asia excluding Japan, said 17 December by e-mail. “Supports from a macro, political, policy and reform perspective still remain intact."

Biggest rally

With the rates differential taken into account, the rupee will gain 10% versus the dollar by the end of 2015, the most among 11 Asian currencies, strategists surveyed by Bloomberg predict. This year, traders buying the rupee using dollars made 6.5%, also the biggest return in the region.

Morgan Stanley says borrowing Singapore dollars to finance rupee purchases is one of its top 10 currency trades for next year, while HSBC recommends investors sell Canadian dollars to buy rupees.

There are signs that high rates, and political reforms, are already having an effect on inflows to Indian assets. Global funds poured a record $42.6 billion into the nation’s bonds and stocks this year, encouraged by the relatively high returns and as Modi’s landslide election victory in May enabled the government to cut fuel subsidies and relax curbs on foreign investment.

“The rupee will benefit the most from lower oil prices," said Khoon Goh, a Singapore-based strategist at Australia and New Zealand Banking Group Ltd. “The Modi government’s reform agenda will also see portfolio inflows being sustained." Bloomberg

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