Pacific Investment Management Co. and HSBC Global Asset Management see opportunity in the Indian rupee’s slide to a record low.
The rupee’s 22 percent slump in the past two years makes it attractive from a valuation perspective, according to Pimco. HSBC Global attributes the slide to 58.985 per dollar this week mainly to the greenback’s global strength and says monetary and fiscal policies will support growth in Asia’s No. 3 economy.
“We are still positive on the debt over the medium term,” Gordon Rodrigues, a Hong Kong-based investment director at HSBC Holdings Plc (HSBA)’s fund management arm, which managed $428 billion of global assets as of March 31, said in a June 10 e-mail interview. “Rate cuts should be positive for equity markets, which will help capital flows. We see this as an opportunity to scale in.”
The rupee will offer dollar-based investors a 9.82 percent gain by the end of the year, second only to the 10.79 percent for the South African rand, according to Bloomberg surveys of strategists and prevailing interest rates. The currency has weakened 6.7 percent this quarter and is Asia’s worst performer.
“It’s among the higher-yielding currencies globally,” Ramin Toloui, Pimco’s Singapore-based global co-head of emerging markets portfolio management, said in an e-mail interview yesterday. “Like all higher-yielding currencies, it is vulnerable during periods of market stress. There are risks associated with political outlook and policy outlook, but we believe that investors get compensated for those risks.”
The rupee pared losses yesterday to close at 58.3950 after Raghuram Rajan, the finance ministry’s top adviser, said the government is considering options including an overseas bond sale to spur fund inflows. It rose 0.4 percent to 58.1825 as of 10:38 a.m. in Mumbai today.
The Reserve Bank of India probably sold dollars yesterday to curb the rupee’s slide, said J. Moses Harding, executive vice president at IndusInd Bank Ltd. (IIB) The central bank doesn’t comment on daily market movements, Alpana Killawala, Mumbai-based spokeswoman for the RBI, said by telephone.
Global funds have sold more Indian debt than they bought each day since holdings touched a record $38.5 billion on May 21, leaving the rupee more vulnerable to an unprecedented current-account deficit. Ownership now stands at $35.2 billion. Speculation that the U.S. Federal Reserve will taper asset purchases as the world’s largest economy recovers has lowered the premium on Indian bonds over U.S. Treasuries.
Rupee-denominated notes offer a premium of 508 basis points over comparable U.S. government debt, and the spread touched 496 on May 28, the lowest in at least a year. The rate on the 7.16 percent notes due May 2023 fell three basis points to 7.28 percent today, according to the RBI’s trading system.
Debt funds focused on developing nations had the biggest weekly outflows since September 2011, with investors pulling out a net $1.51 billion in the period ended June 5, Morgan Stanley said in June 6 report, citing EPFR Global data.
“At some stage sentiment will stabilize,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. (WBC) in Singapore, said in a telephone interview yesterday. “Even if the Fed starts to taper, they will take some time to normalize interest rates.”
Barclays Plc recommends selling India’s sovereign bonds in the wake of the currency slump and global sell-off in emerging-market assets. Investors should sell the notes maturing June 2022 when the yield touches 7.50 percent, analysts Rohit Arora and Igor Arsenin said in a research note yesterday. Barclays had advised buying the debt at 7.94 percent on March 26. The yield was 7.53 percent yesterday.
“The recent rupee weakness reduces the probability of a rate cut at the June 17 monetary policy meeting,” the Barclays analysts wrote. “Should the Reserve Bank of India pause, the next opportunity to cut rates will be July 30, a long time in the current market environment.”
Central bank Governor Duvvuri Subbarao will keep the benchmark repurchase rate at 7.25 percent, 11 of 19 analysts said in a Bloomberg News survey. The rest predict a reduction to 7 percent. The currency’s depreciation threatens to stoke inflation by making imports more expensive.
Subbarao cut the RBI’s benchmark rate by 75 basis points this year to help revive the weakest growth in a decade. India’s economy expanded 5 percent in the fiscal year ended March 31, the government said May 31. That compares with a 10-year average of about 8 percent.
The shortfall in the current account, the broadest measure of trade was $32.6 billion in the three months ended Dec. 31, or 6.7 percent of gross domestic product, compared with a $22.6 billion gap in the preceding quarter, the RBI said March 29.
Subbarao said June 7 that India has a “current-account problem” and added that while inflation has “come off the peak,” consumer-price growth still remains “quite high.”
Prime Minister Manmohan Singh began changes in September to spur growth, woo investment and avert a credit-rating downgrade. Steps have included liberalization in the retail and aviation industries, faster approvals for public works, lower levies on overseas buyers of local bonds and higher taxes on gold imports.
Singh’s policy push has foundered in recent weeks as protests over alleged graft in government disrupted parliament, impeding bills seeking to lure more foreign capital, simplify taxes and provide more land for industry.
Bond risk in India has risen. The cost of insuring the debt of State Bank of India (SBIN), considered a proxy for the sovereign by some investors, using five-year credit-default swaps rose to 240 basis points yesterday from a two-year low of 174 on May 17, according to data provider CMA.
“Given how much the rupee has fallen, and considering yields are still elevated, I wouldn’t be surprised if investors have started averaging themselves into a long rupee position,” said Cavenagh from Westpac. “But they will have to give themselves 12 to 18 months to see gains, and there will be some pain until then.”
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