Rupee Going to Worst From First as Trade Deficit at Record: India Credit
Rupee Going to Worst From First on Trade Deficit
Kainaz Amaria/Bloomberg
The rupee’s advance this year has been spurred by capital inflows, helping the currency rebound after declining 16 percent in 2011, the most in three years.
The rupee’s advance this year has been spurred by capital inflows, helping the currency rebound after declining 16 percent in 2011, the most in three years. Photographer: Kainaz Amaria/Bloomberg
India’s record trade deficit may turn developing Asia’s best-performing currency into its biggest loser from now until the year-end, strategists forecast, weighing on the nation’s bonds.
The trade shortfall widened to $133 billion in the nine months ended December, government data showed on Feb. 1. The rupee will drop 1.2 percent in the rest of 2012, based on the median prediction of 22 analysts in a Bloomberg survey. That is the worst outlook among the region’s 10 most-traded currencies excluding the Japanese yen.
While the rupee climbed 7.5 percent this year, waning optimism for the currency may damp investment in the local bond market, where global funds have trimmed holdings by $200 million from an unprecedented $29.5 billion on Jan. 24. The yield on benchmark 10-year notes has increased 10 basis points to 8.24 percent since the release of the trade data, after declining the most in 20 months in January.
“India has been the recipient of short-term flows based on positive risk sentiment, but fundamentally nothing has changed,” Gordon Rodrigues, a Hong Kong-based investment director at HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion of Asian fixed-income assets, said in an interview on Feb. 6. “There are still concerns about the current account.”
Median Forecast
The rupee’s advance this year has been spurred by capital inflows, helping the currency rebound after declining 16 percent in 2011, the most in three years. Global funds have raised their holdings of rupee-denominated debt securities by $3.3 billion and those of local shares by $3.5 billion, according to the Securities & Exchange Board of India.
The currency, which dropped 0.5 percent to 49.3850 per dollar today, will fall to 50 by the end of 2012, according to the median forecast in the survey. China’s yuan will advance 2.9 percent in the rest of the year, Brazil’s real will appreciate 1.3 percent and Russia’s ruble will drop 3.6 percent, strategists predict.
The gap in the current account, a broad measure of trade flows, will widen in the year ending March, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in New Delhi last month. The deficit may widen to 3.5 percent of gross domestic product from 2.6 percent in the prior 12 months, causing the rupee to weaken 5 percent by end-March, according to Citigroup Inc.
Energy Prices
Europe’s sovereign-debt crisis and commodity prices will determine whether the deficit will worsen this year, according to Nomura Holdings Inc., Japan’s biggest brokerage. The European Union bought almost 19 percent of the South Asian nation’s exports last year and was its largest trading partner, according to data from India’s Department of Commerce.
Crude-oil prices have risen 13.9 percent to $98.76 a barrel in New York in the past 12 months, pushing up India’s import bill. The nation is the world’s fourth-biggest oil consumer and relies on overseas markets for almost 80 percent of its fuel requirements.
“The main risk for the current account is the weakening of European growth as Indian exports will go down very sharply,” Sonal Varma, a Mumbai-based economist at Nomura Holdings, said in an interview on Feb. 6. “The second risk is from global commodity prices: if they pick up, it would significantly worsen the deficit.”
She predicts the shortfall will widen to 3.1 percent of GDP.
Bonds Underperform
The government’s 10-year bonds were little changed today, with the yield on the benchmark 8.79 percent securities due in November 2021 at 8.24 percent, the highest level in more than a week. The yield on the 10-year note fell 30 basis points in January, the most since May 2010. Rupee notes due in a decade yield 623 basis points more than comparable U.S. Treasuries, 9 basis points wider than this year’s low.
The increase in yields this month is crimping returns for investors in rupee-denominated securities. India’s notes advanced 1.7 percent in 2012, according to Asian local-currency debt markets monitored by HSBC Holdings Plc. Investors in Indonesian bonds got 7.4 percent and those in the Philippines earned 2.8 percent.
Efforts by the central bank to regulate foreign-exchange inflows will support the rupee, according to Westpac Banking Corp., Australia’s second-biggest lender. The Reserve Bank of India, which in December reduced the amount of open positions dealers can maintain overnight, has begun relaxing the requirement, according to Deputy Governor H.R. Khan. Banks can apply to the monetary authority to ease their currency positions, Khan told reporters in Mumbai on Feb. 6.
‘Net Positive’
“The Indian economy is still reliant on foreign funding because of the current-account deficit, so any alleviation of that pressure would be good,” Jonathan Cavenagh, a Singapore- based currency strategist at Westpac, said in an interview on Feb. 7. “The RBI doesn’t want to be encouraging speculation in the rupee market, but anything that eases liquidity pressures, which is what this move is designed to do, should be seen as a net positive for the rupee.”
Investor perception of India’s bond risk is being influenced by the rupee’s movements. The cost of protecting the debt of State Bank of India, which some investors consider a proxy for the nation, fell 63 basis points last month as the currency advanced 7.3 percent, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.
‘Jury Still Out’
The cost of credit-default swaps was little changed at 290 on Feb. 8. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.
India’s current-account deficit tends to have an impact on the rupee during times of “stress,” according to Citigroup. The shortfall has increased every year since 2007, surging almost fivefold to $44.4 billion last year from $9.8 billion four years ago, according to government data.
“The rupee’s recent appreciation has been on the back of a recovery in risk appetite and increased global liquidity,” Patrick Perret-Green, the Singapore-based head of foreign- exchange and rates strategy at Citigroup, said in an interview yesterday. “Have domestic fundamentals improved from when the rupee tumbled last year? The jury’s still out on that.”
To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Tushar Dhara in New Delhi at tdhara1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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