Rupee Forecasts Cut After Worst Monthly Performance in Asia: India Credit

Strategists are cutting forecasts for gains in India’s rupee, Asia’s worst-performing currency last month, as capital flows to emerging markets slow because of the worsening debt crisis in Europe.

The Indian currency slid 3.3 percent, the most since May, and touched a 10-week low of 46.125 yesterday, prompting banks including Wells Fargo & Co., Oversea-Chinese Banking Corp. and Credit Agricole SA to concede their predictions were too bullish. The median estimate of 17 analysts for the currency’s 2011 year- end exchange rate fell 2.3 percent to 43.5 per dollar last month, an appreciation of more than 5 percent.

Global funds pulled money from Indian shares last week for the first time since May on concern Europe’s debt crisis is spreading, threatening Prime Minister Manmohan Singh’s efforts to offset Asia’s worst current-account deficit by attracting investment. Currencies from Taiwan and China, which have trade surpluses and combined foreign-exchange reserves of more than $3 trillion, were Asia’s best-performers in November.

“When the external environment is bad, countries like India with low liquidity would get sold off first,” Kenichiro Ikezawa, a fund manager at Daiwa SB Investments Ltd., which manages about $55 billion, said in an interview in Tokyo yesterday. “The rupee will underperform compared with other regional currencies next year.”

Forecasts Cut

Ireland’s bailout by the European Union, the second for a euro nation after Greece’s in May, failed to stem a selloff across euro-region bond markets this week. The costs to insure Portuguese debt against default jumped to a record yesterday and Spanish bonds extended declines.

Wells Fargo, based in San Francisco, cut its end-2011 prediction for the rupee to 41 per dollar from 40.50 last month. OCBC, Singapore’s third-largest bank, reduced its outlook to 44 from 43.45. Paris-based Credit Agricole, France’s second-biggest lender, lowered its 2010 year-end estimate to 44.70 from 44.00.

The rupee was the worst performer in November among the 10 most-traded currencies in Asia excluding Japan, according to data compiled by Bloomberg. China’s yuan was little changed in the period at 6.667 a dollar, while Taiwan’s currency slipped 0.2 percent to NT$30.85.

“Global risk aversion is more destabilizing for the rupee because, unlike other Asian countries, India needs capital flows to fund the current-account deficit,” Mitul Kotecha, the Hong Kong-based head of global currency strategy at Credit Agricole, said in a Nov. 29 interview.

Money managers based abroad sold Indian equities worth an average $13 million each day of the week ended Nov. 26, data from the Securities and Exchange Board of India show. The Bombay Stock Exchange’s Sensitive Index lost 2.6 percent in November, the biggest slump since May.

Option Signals

Foreign holdings of rupee debt fell by $211 million last week, the most in a month, to $17.4 billion, SEBI data show. The declines drove up the yield on India’s three-year government notes by 33 basis points, or 0.33 percentage point, last month to 7.71 percent. Similar-maturity securities yield 3.34 percent in China, 7 percent in Russia and 12.9 percent in Brazil.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, rose 14 basis points to 177 last month, according to CMA prices.

Less Optimistic

Options contracts signal investors are turning less optimistic on the rupee. The premium paid for options offering protection against possible declines in the currency in a month rebounded to 260 basis points last week from a 16-month low of 31 on Sept. 20, data compiled by Bloomberg show.

The so-called risk-reversal rate exceeded the level of 200 for Russia’s ruble and is below 398 basis points for Brazil’s real. The measure for China was a positive 10 basis points, meaning investors are more bearish on the dollar than on the yuan.

India’s $1.3 trillion economy grew 8.9 percent last quarter from a year earlier, matching the revised pace of growth the previous quarter and beating economist forecasts, government figures showed yesterday. India’s economic growth will help the rupee recover recent losses and advance to 42 in the next 12 months, according to Credit Suisse Group AG.

“The rupee’s performance is influenced more by flows into the equities market and with the current risk-aversion situation, it turned quite bearish,” Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse, said in an interview yesterday. “In the long-run, we expect the global economy to be steady and Indian economy to remain strong, encouraging inflows and supporting the rupee.”

Reserves Decline

India’s foreign-exchange reserves have fallen $2.2 billion from a 27-month high of $300.2 billion reached in the week ended Nov. 5, central bank data show. The nation’s current-account deficit widened to a record $13.7 billion in the three months ended June 30, according to the latest central bank data.

“The rupee has been supported by flows but it will still be guided by fundamentals such as the current-account gap,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “Given that the deficit is widening, there is little chance that the rupee can sustain its appreciating bias solely on the basis of equity flows.”

Rising energy prices may further widen the deficit. Government data show monthly oil shipments to India averaged $8.2 billion this year, up from $6.2 billion in 2009, as the commodity gained 8 percent.

“We’re not sure if the currency outlook is so favorable given India’s current-account deficit, which would deteriorate on higher oil prices and weaker global demand,” Agnes Belaisch, head of emerging market fixed-income strategy in London at Threadneedle Asset Management Ltd., which oversees $100 billion, said in an interview yesterday. Even so, she added, Singh’s drive to attract foreign investment “is undeniably supportive of the rupee.”

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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