India Rupee Revived by Rajan as Carry Trade Favorite
Reserve Bank of India Governor Raghuram Rajan has turned the rupee from a pariah to the world’s favorite currency after just a month in office as he intensifies efforts to quell inflation and lure capital.
Investors selling dollars to buy rupees earned 10 percent since Rajan took over on Sept. 4, the most among 44 currencies tracked by Bloomberg and a turnaround from a 2.8 percent third-quarter loss. Options betting on one-month implied volatility show investors becoming more confident in the rupee than for any currency in Asia or the BRIC nations, which also include Brazil, Russia and China.
“We no longer have a crisis of confidence,” Geoffrey Kendrick, the Hong Kong-based head of Asian currency and rates strategy at Morgan Stanley, said in a phone interview yesterday. “The new RBI governor has market credibility. For now, he’s saying all the right things.”
The rupee sank to an all-time low in August after India (GIND10YR)’s current-account deficit grew to a record $88 billion in the fiscal year ended March 2013, threatening to push up inflation in a nation that imports 80 percent of its oil. Rajan, 50, has pledged to do whatever it takes to stabilize the currency. Among his first acts, Rajan unexpectedly raised the benchmark interest rate last month by a quarter-point to 7.5 percent.
The rate boost helped drive the rupee to 61.535 per dollar as of 9:20 a.m. in London, an 11 percent advance from the low of 68.845 on Aug. 28. In the five days after Rajan took office, the currency strengthened a total of 6.9 percent, more than in any month since January 2012, data compiled by Bloomberg show.
Deutsche Bank AG and Citigroup Inc., the world’s two biggest foreign-exchange traders, recommend buying the rupee, in the forwards market and by selling the Singapore dollar. Morgan Stanley’s Kendrick forecasts the rupee will rally to 58 per U.S. dollar in coming months.
Rajan, a former International Monetary Fund chief economist credited with predicting the 2008 global financial crisis, also announced a window for banks to raise new foreign-denominated deposits and debt at a cheaper rate to boost dollar supply, a move that already helped attract $5.6 billion of inflows, he said on Oct. 4 in Raipur, the capital of India’s Chhattisgarh state. Rajan said in an Oct. 10 speech in Washington that the economy will pick up as exports rise.
The new governor “has a lot of proven expertise in the market,” Ron Raychaudhuri, a London-based fixed-income manager at Lombard Odier Investment Management, which oversees $43 billion, said in an Oct. 11 phone interview. “We view him as very market savvy. The steps he has taken have done a considerable amount to stabilize the rupee.”
Rupee carry trades funded in dollars returned 7.5 percent from July to September 2012, the last quarter where the strategy beat gains for all 44 major currencies tracked by Bloomberg. In carry trades, investors borrow where interest rates are low to invest in assets offering higher yields.
India’s 10-year government bonds yield 8.64 percent, compared with 2.72 percent for U.S. Treasuries (USGG10YR), 0.67 percent for Japanese debt and 1.89 percent for German bunds.
Traders selling dollars to buy the Brazilian real had the second-best returns after rupee investors since Sept. 4, with a 9.2 percent gain as of yesterday, data compiled by Bloomberg show. Carry trades buying the New Zealand dollar received 6.1 percent, while the Polish zloty gave a 5.2 percent return.
Emerging-market assets including the rupee were given a boost Sept. 18 when Federal Reserve Chairman Ben S. Bernanke surprised markets by announcing the central bank wouldn’t yet cut the bond purchases it uses to pump money into the economy.
The RBI is limited in what else it can do to strengthen the rupee on concern it will damp growth in Asia’s third-biggest economy, according to BNP Paribas Investment Partners, which manages about $650 billion.
“Rajan is trying to ring-fence the rupee problem and the actions seem fairly successful so far,” Chia Woon Khien, a Singapore-based strategist at BNP, said in a phone interview on Oct. 10. “He doesn’t want further rupee strength because the economy is weak.”
The International Monetary Fund cut its estimate last week for India’s growth for the year through March 2014 to 3.8 percent from 5.6 percent, citing weaker manufacturing and monetary tightening. Standard & Poor’s said last month there’s a more than one-in-three chance India will lose its BBB-investment-grade rating within two years.
There’s a “large” chance of a ratings cut in as little as 12 months, Roland Mieth, the senior vice president of emerging markets at Pimco Asia Pte Ltd., said in a Sept. 16 interview in Singapore. The firm is a unit of Newport Beach, California-based Pacific Investment Management Co., which runs the world’s biggest bond fund.
That’s a dilemma for Rajan, who also faces price increases that unexpectedly accelerated in September. The wholesale-price index rose to a seven-month high of 6.46 percent, more than the 6 percent increase predicted in a Bloomberg economist survey and from 6.1 percent in August, the Commerce Ministry said in New Delhi yesterday. Consumer-price inflation rose 9.84 percent.
The options market shows greater confidence in India’s currency. A gauge of one-month implied volatility in the rupee fell 8 percentage points since Sept. 4 to 14.5 percent, dropping from the highest since December 2008, according to data compiled by Bloomberg. A similar measure for Indonesia’s rupiah slipped 4 percentage points to 15 percent. Bigger price swings make a currency riskier for an investor to hold.
Strategists are scaling back expectations for the rupee to fall. The median forecast in a Bloomberg survey of more than 30 analysts sees it weakening to 63 per dollar by year-end, compared with an estimate of 64.4 on Sept. 23.
Investors are also becoming more confident in other Indian assets. Global funds boosted holdings of Indian stocks by $2.6 billion since the start of September, following net sales of $3.7 billion in the prior three months, stock exchange data show. The benchmark S&P BSE Sensex Index (SENSEX) of shares has rallied about 10 percent.
The trade gap shrank to $6.8 billion last month from $10.9 billion in August, government data showed on Oct. 9, helped by state curbs on gold imports to the world’s largest bullion user.
“The mood is better than it was previously among foreign investors,” Sanjay Mathur, the Singapore-based head of research and strategy at Royal Bank of Scotland Group Plc, said in an Oct. 11 phone interview. “In terms of policy, the focus has shifted to targeting inflation, which is very important because if you can give depositors return above the CPI, it will reduce the demand for gold.”