India’s improving finances, higher real rates and rising forex reserves have played a part in the rupee’s strong showing, the currency has, like its regional peers, also benefited from a weak dollar. Photo: Mint
India’s improving finances, higher real rates and rising forex reserves have played a part in the rupee’s strong showing, the currency has, like its regional peers, also benefited from a weak dollar. Photo: Mint

RBI repo rate cut seen adding fuel to rupee rally as 2-year high reached

Strategists say rupee Asia's best-performing currency of the past six months could climb further as the RBI's repo-rate cut lures more inflows into local shares

Mumbai: There’s no stopping the rupee. Strategists say Asia’s best-performing currency of the past six months could climb further as the Reserve Bank of India’s (RBI) repo-rate cut lures more inflows into local shares.

Benchmark borrowing costs in Asia’s third-largest economy stand at the lowest since 2010, which could spur growth, boost corporate earnings and encourage foreign funds to add to $8.8 billion of Indian stock purchases this year. That optimism sent the rupee to a two-year high after the RBI’s decision on Wednesday.

“The break in USD/INR below 64 suggests that the RBI will not be standing in the way of any increase in inflows, which could lead to some further near-term rupee appreciation," said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. “Interest in the Indian economy will continue to be strong."

ANZ is one of at least three global banks to have recently raised their year-end forecasts for the rupee, which has rallied 5.8% over six months. While India’s improving finances, higher real rates and rising foreign-exchange reserves have played a part in the rupee’s strong showing, the currency has, like its regional peers, also benefited from a weak dollar.

Foreign holdings of rupee-denominated government and corporate debt have surged by Rs1.39 ($21.8 billion) so far this year. While the RBI’s easing will narrow the spread Indian notes offer over Treasuries, strategists say the Asian nation’s yields, still the highest among major regional markets after Indonesia, keep the allure of rupee debt intact.

“Economic and political stability and reform momentum are attracting strong capital inflows, which will mean the rupee is set to continue appreciating," said Abhishek Gupta, India economist at Bloomberg Intelligence in Mumbai. “Attraction for India’s debt market is based on factors such as a higher risk-free rate of return, a strong currency and possibility for further rate cuts."

That said, some investors are growing skeptical about the outlook for foreign flows, arguing that equity valuations look expensive after benchmark indexes surged to record levels. At the same time, global funds have almost exhausted their purchase limits for Indian bonds, leaving little scope for them to add to their holdings of rupee debt in a substantial manner.

Much of the capital inflow into India this year has come from foreign investment into Indian local currency debt," said Ray Farris, Singapore-based head of fixed-income research and economics for Asia Pacific at Credit Suisse Group AG. “This flow is now running up against regulatory limits and is likely to moderate sharply over the coming months."

Farris, however, said his firm expects India’s government to increase limits on global funds’ holdings of bonds, which should prevent flows from “stopping outright." The limits on foreign ownership have been a sore point with fund managers chasing returns in one of the world’s fastest-growing economy. Bloomberg

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