Top Rupee Forecaster Predicts 10% Rally on Inflows: India Credit

India’s rupee will rise at least 10 percent in 2013, its biggest gain in six years, as central bank interest-rate cuts spur growth in Asia’s third-largest economy, according to the most-accurate forecaster.

The currency will strengthen to 50 per dollar, according to Commerzbank AG, which had the closest estimates in the last six quarters as measured by Bloomberg Rankings. Dollar-based investors will earn 14.9 percent, including interest income, from holding rupees this year, based on the median estimate in a Bloomberg survey and prevailing deposit rates. That would be the highest in the world and compares with 8.5 percent on Mexico’s peso and 6.9 percent on China’s yuan.

“With rate cuts you get the inflows into equities and bonds,” Charlie Lay, Singapore-based foreign-exchange strategist at Commerzbank, said in a Jan. 4 telephone interview. “The economy is showing signs of stabilization.”

Global funds have increased holdings of Indian debt by 26 percent since the end of 2011 to a record, while investors poured almost $25 billion into stocks last year as Prime Minister Manmohan Singh unveiled measures to improve growth and public finances. Inflows will rise further as easing inflation allows the Reserve Bank of India to lower the highest borrowing costs among major Asian economies, according to Westpac Banking Corp. and Barclays Plc, the third- and fourth-best forecasters.

Currency Forecasts

Standard Chartered Plc, ranked second, and Westpac predict the rupee will appreciate to 53 per dollar by the end of this year, while Barclays forecasts a level of 53.50 toward the end of 2013. The currency fell 0.1 percent to 55.3050 today. It declined 3.5 percent in 2012 after a 16 percent plunge in 2011.

“With moderating inflation, there will be scope for the RBI to cut rates,” said Commerzbank’s Lay, who expects the central bank to lower its benchmark repurchase rate by 50 basis points by March. “It has been a challenging time for policy makers in the past 12 months given stubbornly high inflation restricted their ability to lower rates.”

Inflation slowed to a 10-month low of 7.24 percent in November, the latest period for which figures are available, and will drop to 7 percent by June, according to the median of nine analysts in a Bloomberg survey. Price gains have remained above the RBI’s comfort level of 5 percent for the past three years and are the highest among the world’s largest emerging markets. Industrial output unexpectedly rose 8.2 percent in October after contracting 0.7 percent the previous month, government data show.

Borrowing Costs

The RBI, which last reduced its benchmark rate in April, will lower it by 25 basis points to 7.75 percent at its Jan. 29 review, according to eight of 10 analysts in a Bloomberg News survey. Two predict a 50 point cut.

The yield on the benchmark 10-year bond was little changed at 7.90 percent today, the lowest level since Dec. 28, 2010, according to data compiled by Bloomberg.

The rate will drop around 70 basis points over six months, according to Barclays Plc, which recommends investors buy the notes. The BSE India Sensitive Index (SENSEX) of shares has climbed 27 percent since the end of 2011 and is 7 percent off its record close of 21,004.96 reached in November 2010.

Rupee-denominated debt returned 11.3 percent in the past year, the second-best performance in Asia after Indonesia’s 13.4 percent, according to indexes monitored by HSBC Holdings Plc.

Capital Inflows

Foreign funds have raised investments in rupee-denominated debt by $7.1 billion since the end of 2011, latest regulator data show. The holdings touched a record $33.3 billion on Jan. 3. Overseas purchases of the nation’s stocks last year were the most among 10 developing-Asian markets tracked by Bloomberg, excluding China. Indian equities saw a withdrawal of $512 million in 2011.

The cost of insuring using five-year credit-default swaps the debt of government-controlled State Bank of India (SBIN), considered a proxy for the sovereign by some investors, slid 200 basis points to 195 since the end of 2011, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Policy Push

Interest-rate reductions will follow Prime Minister Singh’s most-aggressive push in a decade to spur investment and curb the budget deficit. Since mid-September, he has reduced taxes on companies’ overseas debt, cut energy subsidies and allowed more foreign holdings in local-currency bonds and in industries including retailing.

India, the world’s largest bullion buyer, may now raise taxes on gold imports to help tackle a record current-account deficit, Finance Minister Palaniappan Chidambaram said Jan. 2.

“The government seems to be exploring every available option to improve sentiment and further its reform agenda,” Jonathan Cavenagh, a strategist at Westpac in Singapore, said in a Jan. 3 telephone interview. “While the taxes on gold won’t be a dramatic swing factor, India will see inflows and the rupee will be quite a strong performer for 2013.”

A slump in exports amid a faltering global economy will stem the rupee’s appreciation this year, with the currency weakening to 55 per dollar by the end of June before rising in the second half, Standard Chartered predicts. The British bank is “neutral” on the currency.

‘Cannot Ignore’

The shortfall in India’s current account, the broadest measure of trade, widened to $22.3 billion in the three months through Sept. 30, government data showed Dec. 31. Indian exports fell for the seventh straight month in November, the longest stretch of declines since the 2009 global recession, as Europe’s debt crisis curbs overseas sales.

“What one cannot ignore is the current-account deficit,” Priyanka Kishore, currency strategist at Standard Chartered in Mumbai, said in a Jan. 4 interview. “Unless some steps are taken to narrow this, it does seem that it would be difficult for the rupee to go into a sustained sharp rally.”

Still, Indian bonds and equities could see “significant” inflows this year, she said.

The current-account deficit will be funded by capital inflows, according to Barclays, which expects purchases of Indian assets to increase after U.S. lawmakers averted more than $600 billion of tax increases and spending cuts that were to take effect this year. One-year implied volatility, a gauge of expected moves in exchange rates used to price options, fell to 15 basis points to 9.55 percent today.

“Over the next month or so, volatility can fall because some of the global tail risks that markets were facing are receding, but at the same time the global economy is still relatively soft,” Nick Verdi, Singapore-based currency strategist at Barclays, said in a Jan. 4 telephone interview. “That means that currency markets will be reacting largely on the back of liquidity, which will remain very flush.”

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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