- Kshitij Consultancy, ABN Amro see first quarterly gain in four
- Rupee debt handed investors Asia's best return last year
The top rupee forecasters see the Indian currency rallying after three quarters of declines as spending by the government and business tycoons fuel the fastest growth among the world’s major economies.
The currency will strengthen as much as 2.8 percent to 65 a dollar by the end of March, according to Kolkata-based Kshitij Consultancy Services, which had the most accurate estimates in the last four quarters in Bloomberg’s rankings. Second-placed ABN Amro Bank NV predicts an advance to 66 from 66.85 on Monday, before ending the year at 67. The currency has gained in the first quarter of every year since 2010.
As Prime Minister Narendra Modi ramps up spending on roads and ports, billionaires Mukesh Ambani and Sunil Mittal are set to invest $24 billion in telecommunications to meet demand for mobile phone services and e-commerce in the nation of 1.3 billion people. Slowing inflation and four interest-rate cuts by central bank Governor Raghuram Rajan are also aiding India’s economy, while Brazil and Russia are mired in recession and China’s growth is sputtering. Rupee debt handed investors Asia’s best return among major markets in the past year.
“India is an oasis of calm in an otherwise volatile world,” said Roy Teo, a senior foreign-exchange strategist at ABN Amro in Singapore. “The potential is for higher growth with inflation remaining under control, and higher carry returns should help the rupee outperform other Asian currencies.”
Investors borrowing in dollars to purchase rupee-denominated fixed-income assets earned 2.5 percent last year, the best return on carry trades in Asia, data compiled by Bloomberg show. Rupee debt handed investors an 8.6 percent return in local-currency terms in 12 months, indexes compiled by Bloomberg show, followed by 8.2 percent in China. Indonesian notes returned 2.7 percent.
The World Bank estimates growth in Asia’s third-largest economy will quicken to 7.8 percent in the fiscal year starting April 1, from an estimated 7.3 percent in the current period. China is forecast to grow 6.7 percent in 2016, while Russia and Brazil face contractions.
A plan to increase salaries of millions of government employees will boost consumption, according to Nomura Holdings Inc. The Japanese brokerage estimates overall domestic demand, including private and government investment, jumped the most in nine quarters in the three months ended September. Car sales rose 11.4 percent in the eight months to November, industry data show, and oil-product consumption increased at the fastest pace in a decade in October.
Mobile-phone subscribers in India topped 1 billion in October and the country has the highest number of Internet users after China. Large companies and venture capital investors have plowed in more than $10 billion into India’s Internet companies and startups over the past three years, according to Bengaluru-based data provider Tracxn.
Demand for high-speed Internet services prompted Ambani to make a $15 billion foray into the industry. Mittal’s Bharti Airtel Ltd., India’s top wireless carrier, plans to invest 600 billion rupees to improve voice and data quality. Investments in insurance, defense and airline industries are set to increase after Modi opened them to foreigners.
“Global investors are likely to take cognizance of India’s relative stability and better economic variables than some emerging markets,” said Vikram Murarka, chief currency strategist at Kshitij Consultancy, which advises companies on managing foreign-exchange risk. “The government’s reforms over the last year and half may start showing results in coming months.”
Plunging oil prices, a stable currency and limited exposure to China are also making investors bullish. Pacific Investment Management Co. and PineBridge Investments are among funds who say they plan to increase holdings of Indian bonds.
Even so, Barclays Plc predicts the rupee will weaken to 68.50 a dollar by March-end as higher U.S. interest rates trigger outflows from emerging markets and the Reserve Bank of India gradually depreciates the currency to keep exports competitive. That’s more bearish than the median estimate of 67 in a Bloomberg survey of strategists.
“The RBI will continue to absorb dollars and maintain a very steady depreciation path for the rupee,” said Mitul Kotecha, head of Asian foreign-exchange and interest-rate strategy at Barclays in Singapore. China’s devaluation of the yuan will also “cast its shadow” on developing-nation currencies, he said.
The RBI’s dollar buying boosted India’s foreign-exchange reserves by $32 billion, the most since 2007, to $352 billion last year. The rupee weakened 4.7 percent in 2015, the fifth year of declines.
Slowing inflation will allow Governor Rajan to ease monetary policy further, according to ABN Amro’s Teo, burnishing the appeal of Indian assets. The RBI will cut its benchmark rate by 25 basis points to 6.50 percent in 2016, according to the median estimate in a Bloomberg survey of economists, following last year’s 125 basis point reduction.
“Growth and inflation outlook should improve,” Teo said. “That’s positive for the rupee."