Photographer: Dhiraj Singh/Bloomberg

Rupee Seen Less Volatile Than Yuan as Rajan Calls for Discipline

  • Indian central bank holds interest rates for second meeting
  • ABN Amro, Macquarie predict rupee rebound to 67 per dollar

Reserve Bank of India Governor Raghuram Rajan further bolstered his defense of the rupee by leaving interest rates on hold and calling for financial discipline.

Macquarie Bank Ltd. and ABN Amro Bank NV both predicted the currency will strengthen to 67 per dollar by March 31 after Rajan ended a monetary policy meeting with comments focused on cooling inflation, clearing bad loans and fiscal consolidation. Traders’ expectations for swings in the Chinese yuan have risen above those for rupee for the first time in a decade.

“Keeping rates on hold is the right strategy for the rupee in an era of global uncertainty,” said Singapore-based Roy Teo, a senior foreign-exchange strategist at ABN Amro, the second-most accurate rupee forecaster according to Bloomberg rankings. “The rupee will be more stable as compared to other Asian currencies.”

Rajan has helped engineer an overhaul in Asia’s third-largest economy since taking charge at the RBI in 2013, when a record current-account deficit, soaring inflation and weak growth sent the rupee tumbling to unprecedented levels. ABN Amro’s Teo and Macquarie Bank’s Nizam Idris see a rebound to 67 per dollar by end-March, which will mean an advance of 1.8 percent from Wednesday’s level of 68.2150. The currency has weakened 3 percent so far this year as a China-led selloff in emerging markets drove outflows from local stocks. The South Korean won has dropped 3.8 percent.

‘Beacon of Stability’

“The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current-account deficit and commitment to fiscal rectitude,” according to the RBI’s statement Tuesday, when it left the benchmark repurchase rate at 6.75 percent for a second straight meeting, after cutting it by 125 basis points in 2015.

The rupee’s three-month implied volatility, a gauge of expected swings used to price options, has plunged to 7.44 percent from 21.1 percent in August 2013, when the currency hit a record low of 68.845 per dollar. That’s happened as Rajan boosted foreign-exchange reserves to $347.6 billion as of Jan. 22, compared with $275.5 billion at the end of August 2013. The stockpile has fallen this year, a sign that the RBI is intervening to support the exchange rate.

Easing Hopes

Indian sovereign bonds slumped on Tuesday as the lack of specific measures from the monetary authority to boost financial-system liquidity disappointed investors. The yield on notes due May 2025 climbed six basis points to 7.85 percent in Mumbai, the highest close since August, and was steady on Wednesday. The benchmark S&P BSE Sensex index of shares fell 0.9 percent in Mumbai, following a 1.2 percent drop on Tuesday amid speculation the scope for more interest-rate cuts may be limited.

While inflation is expected to be around the RBI’s goal of 5 percent by end-March 2017, planned pay increases for civil servants “will impart upward momentum to this trajectory for a period of one to two years,” the RBI said in its statement, adding that it will adjust the forecast when clarity emerges on timing. The monetary authority’s actions will also depend on the government’s Feb. 29 budget as the administration’s failure to adhere to fiscal targets could jeopardize its inflation aim.

Swaps show traders pared bets for further easing. The cost to lock in interest rates for a year jumped eight basis points, the most since April, to 6.97 percent on Tuesday, and was little changed on Wednesday, according to data compiled by Bloomberg.

“The RBI has flagged upside risks to inflation,” said Anjali Verma, a Mumbai-based economist at PhillipCapital India Pvt. It is unlikely to ease rates further, and the tone of Tuesday’s policy was neutral to slightly hawkish, she said.

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