India’s rupee is falling the most among emerging Asian economies as investors question the government’s ability to implement policies to boost growth, which the central bank predicts will be the least in a decade.
The currency fell 1.8 percent to 53.8150 per dollar last month after rising 5.1 percent in September, when it was the region’s best performer, data compiled by Bloomberg show. October’s decline compares with a 0.2 percent drop in Indonesia’s rupiah and a 1.9 percent gain in the South Korean won. JPMorgan Chase & Co. predicts the rupee will end 2012 at 54, while Credit Agricole CIB forecasts a weakening to 54.50.
The Reserve Bank of India on Oct. 30 resisted Finance Minister Palaniappan Chidambaram’s call for lower interest rates, citing the need to contain inflation even as Governor Duvvuri Subbarao lowered the central bank’s growth forecast for the year through March 31. The rupee pared gains made after Prime Minister Manmohan Singh in the last two months cut subsidies and opened more industries to foreign investors. The biggest policy overhaul in a decade cost Singh the support of his main ally, leaving the government in a minority.
“The stability of the government itself is at stake today,” Aneesh Srivastava, who oversees $470 million of assets as chief investment officer at IDBI Federal Life Insurance Co. in Mumbai, said in an Oct. 30 interview. “Enough time has gone by since the unveiling of the reforms, so people now have to walk the talk. The RBI will need to see real action before they react, instead of anticipation or promises.”
Chidambaram and Singh’s prescription for reviving growth will face its first test when parliament reconvenes. Opposition parties are threatening a no-confidence vote when lawmakers meet for the winter session scheduled to begin on Nov. 22.
Singh’s Congress party is relying on outside support from smaller regional groups after West Bengal state Chief Minister Mamata Banerjee’s Trinamool Congress pulled out on Sept. 21 after Singh raised fuel prices and allowed foreign investment in retail and airlines to curb the budget deficit and jumpstart economic growth.
Subbarao cut the RBI’s growth forecast for the fiscal year to 5.8 percent from 6.5 percent, raised its estimate for gains in wholesale prices to 7.5 percent from 7 percent and said consumer prices will stay elevated mainly due to food costs. He lowered reserve requirements for banks to a 36-year-low of 4.25 percent and kept the benchmark repurchase rate at 8 percent.
“The baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13,” Subbarao said in the Oct. 30 monetary policy statement. “The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.”
A rate cut is unlikely before next quarter unless growth slides below 5 percent, said Srivastava of IDBI Federal. He gauges the rupee’s fair value at between 53 and 54 per dollar. The currency rose 0.1 percent to 53.7450 per dollar today.
Wholesale prices, which rose 7.81 percent in September, the highest level this year, could climb further this quarter before easing in 2013. Wheat prices in India, the world’s second-biggest producer and consumer of the commodity, surged 29 percent this year on the National Commodity & Derivatives Exchange Ltd. as the FAO’s World Food Price Index climbed 7.7 percent last quarter.
Soaring global prices of farm products will keep RBI from reducing interest rates this year, according to Sean Yokota, the Singapore-based head of Asia strategy at Skandinaviska Enskilda Banken AB, Sweden’s third-biggest lender by assets.
“Food inflation can always spread, so I am waiting for some relief,” Yokota, who predicts the rupee will end 2012 at 53.50 per dollar, said in an Oct. 30 interview. “That will allow the RBI to cut in earnest and will be positive for rupee-denominated debt and the currency.”
The RBI will only lower interest rates gradually, which will keep the yield on Indian government bonds higher than those of developed nations, according to Standard Chartered Plc.
The yield on 10-year benchmark sovereign notes was little changed today after rising 6 basis points, or 0.06 percentage point, last month to 8.22 percent, according to data compiled by Bloomberg. The notes offer an extra 651 basis points over similar-maturity Treasuries, versus a 185 basis-point premium on Chinese bonds.
Rupee-denominated debt returned 8.1 percent this year, the second-best performance after Indonesia’s 8.9 percent, according to indexes compiled by HSBC Holdings Plc. Dollar-based investors could earn 15.2 percent, including interest, on rupee purchases by the end of 2013, data compiled by Bloomberg show.
“The Indian government might have hoped for a more decisive step but inflation is elevated, and likely to head higher in coming months, while steps to curb the budget deficit are likely to only have a very modest impact,” Robert Minikin, Hong Kong-based strategist at Standard Chartered, said in an Oct. 30 research note. “Given the positive carry, real-money funds should boost rupee exposure” as the potential of higher returns offsets weak growth, he wrote.
Holdings of Indian debt by global funds rose $1.4 billion in October to a record $32.5 billion on Oct. 30, according to data from the capital markets regulator. Overseas investors added $1.9 billion to holdings of local shares last month, after a $2.3 billion increase in September, the data show.
Credit risk for government-controlled State Bank of India, considered a proxy for the sovereign by some investors, touched a 14-month low of 248 basis points on Oct. 31. The cost of insuring the Mumbai-based lender’s debt for five years against non-payment using credit-default swaps fell 24 basis points last month, according to data provider CMA.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.
“A combination of pushing rate easing further away, and expectations of higher inflation and slower growth, will weigh on sentiment,” Dariusz Kowalczyk, a strategist at Credit Agricole in Hong Kong, said in an Oct. 30 telephone interview. “The forecasts also make it more difficult for the RBI to trust the government’s fiscal target, and indeed the central bank suggested it will wait for proof of consolidation.”