Big­gest cur­rency trader backs ru­pee amid best rally in two years

The Pak Banker - - 6BUSINESS -

MUM­BAI: Citibank is pre­dict­ing In­dia's ru­pee will hold much of the gains from what looks set to be its best month in two years. The re­solve shown by Prime Min­is­ter Naren­dra Modi in seek­ing to nar­row the fis­cal deficit to a nine-year low has boosted in­vestor con­fi­dence and will prob­a­bly sup­port cap­i­tal in­flows, said Bhanu Vohra, Mum­bai-based head of for­eign ex­change for South Asia at the U.S. bank. Citibank, part of the world's largest cur­rency trader Cit­i­group Inc., sees the ru­pee hold­ing in a range as in­vestor ap­petite for de­vel­op­ing-na­tion se­cu­ri­ties is pres­sured by the Fed­eral Re­serve's pol­icy tight­en­ing and yuan weak­ness. "We ex­pect this strength in the ru­pee to be range bound, with our medium term view of weak emerg­ing-mar­ket cur­ren­cies in­tact," said Vohra, who sees a range of be­tween 66-69 per dol­lar in the "medium term." The ru­pee "can be an out­per­former in Asia should the govern­ment ex­e­cute the bud­get plans," he said.

De­vel­op­ing-na­tion cur­ren­cies are re­bound­ing as a re­cov­ery in crude oil prices and the will­ing­ness of global cen­tral banks to sup­port growth spurs risk ap­petite. The ru­pee has jumped 2.4 per­cent this month to head for its big­gest gain since March 2014, af­ter weak­en­ing last month to the brink of a record low. For­eign funds have pumped a net $2.4 bil­lion into In­dian stocks in March, af­ter two months of out­flows.

The ru­pee is still Asia's worst-per­form­ing cur­rency this year, hav­ing lost 1 per­cent to 66.8450 a dol­lar in Mum­bai on Wed­nes­day. It fell to 68.7875 on Feb. 26, near a record low of 68.845 seen in Au­gust 2013. Mor­gan Stan­ley this month slashed its year-end ru­pee fore­cast to 73 from 70.

The In­dian cur­rency "is likely to un­der­per­form in a riska­verse en­vi­ron­ment that we ex­pect will con­tinue to dom­i­nate fun­da­men­tals over the next few quar­ters," Mor­gan Stan­ley strate­gists led by Lon­don-based Hans Redeker wrote in a March 13 re­port. Ru­pee "longs are crowded, and weak­en­ing risk ap­petite sug­gests that the equity-dom­i­nated cap­i­tal in­flows may ease from here." Two Fed­eral Re­serve of­fi­cials Mon­day said in­ter­e­strate in­creases may be war­ranted as soon as next month, cit­ing solid read­ings on the U.S. econ­omy. The Fed­eral Open Mar­ket Com­mit­tee next meets April 26-27. It held off from rais­ing bor­row­ing costs last week and halved pro­jec­tions for how many times it would hike rates this year to two.

The ru­pee's "cur­rent rally is on the back of the FOMC turn­ing more dovish than ex­pected and a gen­eral risk-on sen­ti­ment re­turn­ing to Asia, also led by the yuan ap­pre­ci­at­ing," Vohra said. "The ru­pee will re­main be­tween 66-69 to a dol­lar in the medium term. We don't see it ap­pre­ci­at­ing below 66 and or go­ing to 72 ei­ther." For­eign hold­ings of ru­pee-de­nom­i­nated govern­ment and cor­po­rate bonds have climbed 44.8 bil­lion ru­pees in the last five days, data from Na­tional Se­cu­ri­ties De­pos­i­tory Ltd. show. That's helped take net in­flows to 17.2 bil­lion ru­pees for this month, af­ter with­drawals of 87.6 bil­lion ru­pees in Fe­bru­ary, which were the big­gest since April 2014.

Fi­nance Min­is­ter Arun Jait­ley on Feb. 29 re­tained a tar­get of nar­row­ing the fis­cal deficit to 3.5 per­cent of the gross do­mes­tic prod­uct in the year start­ing April 1. He boosted spend­ing on a ru­ral jobs pro­gram, while bud­get­ing for higher wages and mil­i­tary pen­sions. UBS Group AG sees the ru­pee weak­en­ing to 70 a dol­lar by the year end, Bhanu Baweja, Lon­don-based head of emerg­ing-mar­ket cross-as­set strat­egy, pre­dicted ear­lier in the month, cit­ing the slump in In­dia's ex­ports and risks the bud­get will reignite in­fla­tion.

Ship­ments from Asia's third-largest econ­omy fell 5.7 per­cent in Fe­bru­ary, a 15th straight month of con­trac­tion. The cur­rentac­count deficit in the quar­ter through De­cem­ber was $7.1 bil­lion, wider than the me­dian $3 bil­lion in a Bloomberg sur­vey of econ­o­mists, as over­seas earn­ings from ser­vices slowed.

"The ben­e­fits of a weak cur­rency on the ex­ports of a coun­try are ob­vi­ous, but also at times over­stated," said Vohra of Citibank. "A very weak cur­rency has other as­so­ci­ated is­sues like be­ing in­fla­tion­ary to start with. It also puts long-term in­vestors at bay as their cap­i­tal re­turns de­cline. In­dia is no dif­fer­ent."

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