Indian stock rallies propel red-hot rupee

MUMBAI: Foreign investors gorging on Indian stocks and bonds placed the rupee on course for its best first-quarter performance since 1975.

The currency, Asia’s best performer in March, has rallied 4.8% since Dec 31 as a thumping win for Prime Minister Narendra Modi’s party in state elections boosted bets for continuation of the government’s reformist agenda. The US Federal Reserve’s dovish tone on future rate increases, which has contributed to a weaker dollar, also burnished the allure of assets in emerging markets.

“Change in sentiment toward India after the recent state elections and high real rates have attracted large portfolio flows into equity and debt,” said Gopikrishnan MS, the Mumbai-based head of foreign exchange for South Asia at Standard Chartered. “Market action indicates that the Reserve Bank of India has been intervening and we think they could continue to do so if the flows continue.”

Foreign holdings of rupee-denominated government and corporate bonds climbed by 359.4 billion rupees (US$5.5 billion) in the first quarter, with 272 billion rupees coming in March alone, the most for any month in Bloomberg-compiled National Securities Depository Ltd data going back to mid-2011.

Overseas funds have poured $6.1 billion into Indian stocks since Jan 1, of which $4.5 billion has come this month.

The rupee climbed 0.1% to 64.85 per dollar in Mumbai on Friday, taking its gain this month to 2.8%. The three-month advance was the biggest for any quarter since the period ended September 2012. The S&P BSE Sensex share index has rallied 11.2% this year, and on Friday completed its best quarter since the period ended June 2014.

The Sensex is expected to reach a record high by midyear, according to a Reuters poll of brokers, who have upgraded their forecasts significantly from three months ago. A separate Reuters poll showed the rupee is expected to weaken to 68.29 in six months and 68.84 in a year compared with just under 65 now.

“Unlike in the past, the RBI’s intervention in the currency market has not been aggressive enough this time around,” HDFC Bank economists wrote in a report last week. “The fair value of the rupee has changed from around 67 to 65 currently.”

The currency “could trade in the 65.50-66.00 range by May or so” said Gopikrishnan of Standard Chartered.

Yields on local sovereign bonds, among the highest in Asia, are another reason foreign investors are flocking to India. The 10-year yield jumped 46 basis points in February, the most since July 2013, after policymakers unexpectedly signalled an end to the monetary easing cycle. It slipped 19 basis points in March, helped by the inflows.

At 6.68% on Friday, India’s 10-year government notes were paying 427 basis points more than similar-maturity US Treasuries.