India’s rupee was Asia’s worst performer in April and losses deepened in May, typically the cruelest month for the currency.
The reasons for selling Indian assets are mounting, including rising crude oil costs, fading confidence in Prime Minister Narendra Modi and a spat between global investors and the government over backdated capital gains taxes. The currency lost 1.5 percent against the dollar last month, wiping out the first quarter’s 0.9 percent advance, and analysts cut estimates for the first time since January. It fell another 1.2 percent to 64.17 a dollar so far in May, a month in which the rupee sank an average of 3 percent in the last five years.
“The rupee seems to be facing a lot of headwinds,” Divya Devesh, Standard Chartered Plc’s Asia foreign-exchange strategist in Singapore, said in a May 12 e-mail interview. Australia & New Zealand Banking Group Ltd. in April lowered its end-2015 forecast and Credit Suisse Group AG estimated the currency will retreat to 66 per dollar in 12 months. HSBC Holdings Plc sees that level by the end of this year.
The median forecast is still for the rupee to end 2015 at 63.63, according to a Bloomberg survey of analysts, amid inflows from global fund managers and confidence in the central bank. The following are seven reasons why sentiment has started to deteriorate.
1. The May Jinx
The rupee retreated in May during four of the last five years. The month typically has “the most number of auspicious days for Indian weddings, which sees a rise in gold demand and other associated spending,” according to ANZ. Indians buy jewelry as marriage gifts and as part of the bridal trousseau.
Gold imports by the world’s biggest consumer surged 94 percent in March from a year ago to $4.98 billion. Policy makers raised import taxes on the metal three times in 2013 to help curb the current-account deficit and stem losses in the rupee, which sank to a record 68.845 in August of that year.
2. Inflation Risks
India imports about 80 percent of its oil and the optimism around local assets in the past year had much to do with the plunge in Brent crude prices, which helped slow consumer-price gains, allowing the Reserve Bank of India to cut interest rates.
Now, the fuel’s 22 percent rally since March, coupled with the risk of deficient monsoon rains, is raising doubts over the outlook for inflation and monetary easing. The June-September monsoon is all the more crucial this year after unseasonal rain and hail ravaged winter crops.
3. Widening Trade Gap
The trade deficit swelled to a four-month high of $11.8 billion in March as exports slumped 21 percent from a year earlier, the most since 2009. The current-account gap for the October-December period, the latest quarter for which data is available, held near its widest since June 2013.
Export growth is likely to remain subdued until the U.S. and Chinese economies recover more meaningfully in the late summer, Credit Suisse wrote in an April 29 report.
4. Tax Uncertainty
A government demand for a retrospective tax on capital gains spooked foreign investors in April, resulting in net inflows into local bonds slowing to $549 million, the smallest in 12 months. Stocks took in $1.2 billion, the least in 2015.
Even as India put such demands on hold this week, they’ve reinforced concern among foreigners that the bureaucracy will be hard to unravel. An Aberdeen Asset Management Plc fund is challenging the demand for the so-called Minimum Alternative Tax, according to Asia Managing Director Hugh Young, who said he’s concerned about more such claims in the future. Global funds have cut debt holdings by $981 million so far in May. Stock and bond inflows were a record $42 billion in 2014.
5. RBI Intervention
The rupee’s real effective exchange rate versus currencies of 36 trading partners posted a 4 percent gain in the first quarter, according to Standard Chartered. That’s led to speculation that the RBI will counter any appreciation. The currency’s relative strength is pressuring margins for some exporters, Governor Raghuram Rajan said on April 7.
Net dollar purchases by the central bank in the spot market totaled $27.7 billion in the first quarter. Bank of America Merrill Lynch in April predicted the authority would buy $62.5 billion over 12 months to keep the rupee competitive. The currency “needs to weaken to 64 or maybe 65” a dollar this year, Ashima Goyal, a member of the RBI’s technical advisory panel, said in an interview last month.
6. Fading Modi Magic
As Modi finishes his first year in office, investors who bought into his campaign promises of reviving Asia’s third-largest economy are becoming frustrated. Rallies in stocks and bonds are reversing as opposition parties hamper his ability to push through change, such as a land-acquisition bill.
“With much of the positivity already baked into the asset markets, the focus is on growth and reform deliverables, which are yet to catch-up with euphoric expectations,” according to Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “This might hurt the extent of incremental foreign inflows which might be channeled to the markets in the coming months.”
7. Fed Tightening
Investors are also weighing the impact of a potential increase in U.S. interest rates. The rupee’s tumble to a record low in 2013 came after the Federal Reserve’s signal to withdraw monetary stimulus saw an exodus of funds from emerging markets.
While India has boosted its foreign-exchange reserves to an unprecedented $351.9 billion, uncertainties surrounding the Fed’s rate path continue to weigh on the rupee, said Andy Ji, a strategist at Commonwealth Bank of Australia in Singapore.