Nomura: Rupee, baht to outdo Asian peers
This year, the rupee and the Thai baht are expected to yield the highest returns within the Asian basket, according to Nomura currency strategist Dushyant Padmanabhan. "We favour currencies with supportive fundamental/idiosyncratic dynamics with some offsetting short positions. For instance, we are recommending long rupee and Thai baht positions, among others, offset by short Philippine peso and Hong Kong dollar positions, among others," Padmanabhan told Cogencis in an e-mail interview. He sees GDP growth in India recovering and expects continued capital inflows, led by foreign direct investment, to support the rupee. The Indian currency, he said, may touch 63.00 a dollar by the middle ofthis year if the government maintains fiscal consolidation in the upcoming Union Budget and "if there are signs of less dollar-buying FX intervention from the RBI (Reserve Bank of India)".
On India being mentioned in a US Treasury report on currency practices of major trade partners of the US, Padmanabhan said all central banks and governments, including of India, would be "wary" of such a mention, "especially given the Trump administration's focus on trade". In a report released in October, the US Department of the Treasury Office of International Affairs had published a list of five major US trading partners, which it said it would closely monitor for currency practices. While India wasn't on the list, the US Department said that given the "notable" rise in the scale and persistence of foreign exchange purchases by India, its foreign exchange and macroeconomic policies would be closely observed.
The mention of India in the report has drawn foreign attention to the RBI’s intervention strategy, and there have been discussions on whether the RBI will now refrain from buying the greenback very aggressively. Edited excerpts of the interview:
Q. With oil prices, inflation and current account deficit rising, and the government announcing additional borrowing, do you expect Indian assets to lose some of their allure within the Asian basket for foreign portfolio investors?
A. What we have observed is that while these concerns have indeed risen recently, the rupee continued to perform, also boosted by a constructive global backdrop for EM (emerging market) and risk assets. In these conditions, the rupee and India can continue to attract inflows, particularly if the economy continues to show signs of a cyclical upswing. This would be an indication of a recovering economy--GDP growth as well as higher-frequency indicators such as PMI (purchasing managers' index), industrial production, consumption, and trade data. Continued progress in economic reforms, such as the rise in ease-of-doingbusiness rankings and Moody's ratings upgrade also bolster our medium-term constructive view.
Q. Broad weakness in the dollar has given a fillip to most Asian and emerging market currencies. Do you think the rupee is overvalued on real effective exchange rate terms? What according to you is the fair value of the rupee?
A. Our forecast is for dollar/rupee to trade lower, towards 63.0 towards the mid-year. In the near term, the rupee could also be supported if the government maintains its fiscal consolidation at the upcoming Budget. The rupee will also be supported by India's recovering growth, continued capital inflows (led by strong FDI inflows) and if there are signs of less dollar-buying FX intervention from RBI. We do not view rupee as overvalued. While REER is high relative to its long-term average, other measures such as the productivity-adjusted REER and current account-based models (fundamental equilibrium exchange rate) actually suggest undervaluation. Overall, across our suite of models, we see the rupee as close to fair value.