Rupee Options Bullish Even as 2013 India Forecasts Cut

Options traders are the most bullish in four years on India’s rupee as global funds step up purchases of the nation’s bonds. Strategists are yet to be convinced.

Six-month contracts conferring the right to sell the rupee against the dollar cost 65 basis points more than those to buy on Jan. 22, the least since January 2008, data compiled by Bloomberg show. The so-called risk reversal rate slumped to 99 basis points from a 2012 peak of 478 in May and compares with 431 for Indonesia’s rupiah and 10 for China’s yuan. By contrast, strategists surveyed by Bloomberg have pared their 2013 rupee forecasts by the most among emerging markets.

Overseas holdings of Asia’s highest-yielding debt touched an all-time high this month as global central banks pumped cash into markets to revive growth. ING Vysya Bank Ltd. and Commonwealth Bank of Australia Ltd. cut their outlooks on the currency this year, warning that the inflows will be overwhelmed by the widening in India’s record current-account deficit.

“The options market is considering continuing inflows will support the rupee,” said Upasna Bhardwaj, an economist at ING Vysya in Mumbai. “However, in the second half, we could see some talk about an improvement in the U.S. economy and gradual phasing out of stimulus measures. That will slow inflows to emerging markets and revive concern about India’s current-account deficit.”

ING Vysya, part of ING Groep NV, the biggest Dutch financial services company, cut its end-2013 rupee forecast to 55 per dollar from the 50 level it predicted as of Dec. 31. The currency fell 0.4 percent to 53.7150 today.

Current Account

Banks lowered their predictions for the exchange rate to the dollar since Dec. 31 by 1.9 percent, the most among the 22 emerging currencies with surveys by Bloomberg. Forecasts were cut by 1.4 percent for the rupiah and by 1.2 percent for the South African rand. The rupee will end 2013 at 53, according to the median of 31 estimates, compared with 52 projected earlier.

The shortfall in India’s current account, the broadest measure of trade, widened to a record $22.3 billion in the quarter through September, latest official data show. Indian exports declined for an eighth straight month in December, while imports rose 6.3 percent.

Nomura Holdings Inc., Japan’s biggest brokerage, and Kotak Mahindra Bank Ltd. predict the gap will widen to as much as 5 percent of gross domestic product in the year through March 31 from 4.2 percent the previous 12 months. The rupee will plunge to a record 59 per dollar by December-end, according Nomura.

‘Good Start’

Foreign holdings of local debt reached a record $33.7 billion on Feb. 1, up from $29.3 billion a year earlier, according to exchange data. Overseas investors pumped $4.1 billion into Indian equities last month, following $4.4 billion of net purchases in December, the largest inflow in 10 months.

“We’ve had a very good start to the year, and for the next little while we are going to be in a consolidation phase without seeing any further dramatic rupee strength,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. Australia’s second-biggest lender predicts the rupee will end 2013 at 53.13 per dollar.

The rupee rebounded from a record low of 57.3275 reached June 22, after Prime Minister Manmohan Singh began his biggest growth push in a decade in mid-September by opening more industries to foreign investment and cutting fuel subsidies. The measures came after Standard & Poor’s and Fitch Ratings warned India risks having its credit rating cut to junk. Both companies rank India BBB-, the lowest investment grade.

Opening Up

The Securities and Exchange Board of India, the markets regulator, on Jan. 24 increased the limit on foreign purchases of rupee debt by $10 billion to $75 billion, and said investors can now buy bonds of any tenor. Overseas funds could earlier only buy sovereign debt with a residual maturity of three years.

The changes are attracting long-term investors such as global central banks and sovereign wealth funds to Indian debt, according to HSBC Holdings Plc. The notes returned 11.3 percent in 12 months, the most among 10 Asian markets monitored by HSBC.

The yield on India’s benchmark 10-year bond rose one basis point, or 0.01 percentage point, to 7.85 percent today, according to data compiled by Bloomberg. Similar-maturity notes yield 3.6 percent in China, 5.25 percent in Indonesia and 3.08 percent in South Korea.

‘Nicely Aligned’

“The forces are nicely aligned for the rupee to appreciate in this quarter,” said Hitendra Dave, Mumbai-based head of global markets at HSBC in Mumbai. “But the reality is we need all these flows each week and month for the next many months to make sure the rupee remains stable, because the fact of the matter is we are importing much more than we export.”

State asset sales also helped attract inflows. India raised 31.4 billion rupees this month from an auction of shares of energy explorer Oil India Ltd., with foreign funds buying 60 percent of the 60.1 million shares offered, the company said in a Feb 5 statement. The sale of a 9.5 percent stake in NTPC Ltd., Asia’s second-largest electricity generator by value, raised 114.7 billion rupees, the New Delhi-based company’s Chairman Arup Roy Choudhury said Feb. 8. The government plans to offer shares in four more companies by March 31.

‘More Comfortable’

Investors are “more comfortable” that investment flows will help finance the current-account gap in the near term, and the Reserve Bank of India will be unwilling to let the rupee weaken, according to Credit Suisse AG. Options should be used to hedge rupee purchases because the currency may drop as the year progresses, according to the Swiss bank, which projects a year-end level of 56.50.

“Beyond the next several weeks of capital-flow visibility, financing India’s still large current-account deficit will likely return to being a challenge and we expect the rupee to turn weak in the second quarter,” Credit Suisse analysts including Singapore-based Ray Farris wrote in a Feb. 1 research report. “Against this background, dollar-rupee risk reversals are close to pre-crisis levels of cheapness.”

The cost of insuring State Bank of India debt, considered a proxy for the sovereign, for five years against non-payment slid 23 basis points this year to 203 on Feb. 8, according to data provider CMA, which is owned by McGraw-Hill Cos. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“We are seeing inflows and there is the expectation of more as global liquidity is high,” Vikas Babu, a trader at state-run Andhra Bank in Mumbai, said in a Feb. 6 interview. “There is a sense right now that the flows will be strong enough to cover the current-account deficit.”

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