Ru­pee is Asia’s worst per­former, again

The Hindu Business Line - - BANKING -

The turn of for­tune for the ru­pee could not be more rapid. It has gone from be­ing Asia’s best per­former to the worst in two weeks.

A re­bound in oil prices, the na­tion’s top im­port, and con­cerns about an ex­pen­sive bailout for farm­ers be­fore gen­eral elec­tions to be held by May, have caused the ru­pee to miss out on a re­vival in emerg­ing cur­ren­cies. Funds are in­stead pil­ing into the In­done­sian ru­piah and Chi­nese yuan on op­ti­mism over trade talks and signs of a Fed­eral Re­serve rate hike pause.

“The ru­pee may be lead­ing the di­ver­gence within EM Asia and un­less oil’s tra­jec­tory changes it will be a short,” said Vishnu Varathan, head of eco­nom­ics and strat­egy at Mizuho Bank in Sin­ga­pore. “The cur­rency will trail Asian peers as oil’s am­pli­fied ef­fects via in­fla­tion, cur­rent ac­count and fis­cal channels are bump­ing up against re­newed con­cerns about fis­cal slip­page from farm waivers.”

The ru­pee has slid about a The ru­pee’s three-month his­tor­i­cal volatil­ity is now the high­est among ma­jor cur­ren­cies in Asia

Back to square one

per cent ver­sus the dol­lar this year after post­ing the best quar­terly gain since March 2017. The Bloomberg JPMor­gan Asia Dol­lar In­dex and al­most all re­gional cur­ren­cies have strength­ened, led by the ru­piah and the Thai baht.

Gold­man Sachs Group Inc pre­dicts the ru­piah to out­per­form the ru­pee be­cause of di­verg­ing im­pact of oil prices, port­fo­lio flows and mon­e­tary pol­icy sen­si­tiv­i­ties to the US Fed.

Ab­erdeen Stan­dard In­vest­ments, which held $384 bil­lion global as­sets in June, is ad­vis­ing in­vestors to sell In­dian gov­ern­ment bonds and pile into Philip­pine debt.

A Bloomberg sur­vey of an­a­lysts

fore­cast a drop to 71.20 per dol­lar by March 31. Mizuho Bank sees the cur­rency’s drop ex­tend­ing to 72.50 by endMarch, while ING Group ex­pects it to test 73 lev­els dur­ing the pe­riod. The ru­pee fell 0.1 per cent to 70.49 as of 1:36 p.m. in Mum­bai.

Oil de­pen­dence

“The ru­pee may con­tinue to un­der­per­form like what hap­pened last year when Asia’s most oil-de­pen­dent cur­ren­cies, in­clud­ing IDR and PHP, were hit hard,” said Prakash Sak­pal, econ­o­mist at ING Groep NV in Sin­ga­pore. How­ever, do­mes­tic fac­tors are more promi­nently neg­a­tive for INR this year than last.

In­dia re­lies on im­ports to meet about 80 per cent of its en­ergy needs and higher costs may un­set­tle the gov­ern­ment’s fis­cal math. Every $10 rise in oil prices widens the cur­rent ac­count gap by $12.5 bil­lion, or 43 ba­sis points of the gross do­mes­tic prod­uct, and bumps up in­fla­tion by 49 ba­sis points, ac­cord­ing to a cen­tral bank study.

The ru­pee’s de­cline is also ac­cen­tu­ated by deep­en­ing bond losses, trig­gered by wor­ries that the rul­ing party may bust its fis­cal deficit tar­get through pop­ulist mea­sures to boost chances of re-elec­tion after suf­fer­ing elec­toral losses in three key states last month.

Bond yields

The yield on 2028 bonds, the most traded, climbed to 7.52 per cent on Thurs­day, re­bound­ing from a nine-month low of 7.22 per cent in De­cem­ber. Mean­while, the ru­pee’s three­month his­tor­i­cal volatil­ity is now the high­est among ma­jor Asian na­tions.

“With the risk of fis­cal slip­page ris­ing, bond mar­ket is ner­vous and that’s get­ting trans­mit­ted to the ru­pee,” said Anindya Baner­jee, a for­eign ex­change an­a­lyst at Ko­tak Se­cu­ri­ties in Mum­bai.

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