Goldman Reversal Mirrors Rupee’s Trade Improvement: Currencies

Firms from Goldman Sachs Group Inc. to Deutsche Bank AG are putting their faith in India’s rupee as the country looks forward to the biggest improvement in its broadest measure of trade in a decade.

Goldman Sachs, which ranked India as the most vulnerable Asian market in September, now predicts the rupee will beat peers from Brazil to South Africa and Turkey. Deutsche Bank, the largest foreign-exchange trader, and Barclays Plc say it’s their favorite emerging-market currency. The rupee has risen 6.8 percent against the dollar over the past six months, the most among 11 Asian currencies tracked by Bloomberg.

Investors are seeking safe, high-yielding assets as the U.S. Federal Reserve reduces stimulus and after a slowdown in China contributed to the worst start to a year for emerging-market currencies since 2009. For many, India fits the bill, as policy makers take steps to reverse a slump that sent the rupee tumbling to a record last August.

“India looks in much better shape now than it did six months back,” Kim Jin Ha, a global fixed-income fund manager in Seoul at Mirae Asset Management Co., which oversees about $59 billion, said by e-mail March 3. “Capital flows can continue.”

Funds Return

The rupee’s recovery bodes well for India’s efforts to curb the fastest consumer-price inflation after Argentina among the Group of 20 nations, and to boost inflows to help revive the slowest economic growth in a decade. Less than three months into 2014, foreigners have already plowed back more than half of the $8 billion they pulled from local bonds last year.

India’s rupee climbed as much as 1.1 percent today to 61.1050 per dollar, the strongest level since Dec. 10, and was at 61.1150 as of 3:33 p.m. in New York. It has risen from an all-time low of 68.845 on Aug. 28. The rupee weakened 13 percent in the second and third quarters of last year amid a decline in the country’s manufacturing industry and monetary tightening.

The rupee may get a boost after India’s current-account deficit narrowed to a four-year low as the world’s second-largest bullion-consuming nation raised gold-import tariffs.

The shortfall in the broadest measure of trade, which tracks goods, services and investment income, was $4.2 billion last quarter, down from $5.2 billion in the prior three months, the Reserve Bank of India said yesterday in Mumbai.

The deficit will shrink to $45 billion in the year ending March 31, from $88 billion in the prior period, Finance Minister Palaniappan Chidambaram predicted last month.

‘Small Long’

Goldman Sachs said in February that it saw the rupee at 62 in three months’ time, while its asset-management arm opened this year what it called a “small long” position on the currency. HSBC Holdings Plc advises buying the rupee and selling Indonesia’s rupiah, while Deutsche Bank and Morgan Stanley predict India’s currency will strengthen against the Brazilian real, according to client notes last week.

Oversea-Chinese Banking Corp. may buy Indian assets because the economy is less exposed to China’s faltering growth than nations including South Korea, Emmanuel Ng, a strategist at the Singapore-based firm, said by e-mail on Feb. 26.

“I see the inflows continuing,” said Rajeev De Mello, who oversees $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd. in Singapore.

‘Big Doubts’

Analysts surveyed by Bloomberg lifted the median mid-year forecast for the rupee to 62.6, from 63.25 three months ago.

While that’s a bigger increase than for any of its Asian peers, it still signals a drop of more than 1 percent by June 30. Credit Agricole SA says the rupee will weaken to 70 per dollar by mid-year as a clampdown on bullion shipments boosts unofficial imports and India prepares for elections next month.

“India’s external position is not as good as it looks,” Dariusz Kowalczyk, a Hong Kong-based strategist at France’s third-biggest bank, said in an interview on March 4. “India’s imports of gold have actually increased. I have big doubts whether the government that will come out of the elections will be welcomed by the markets.”

RBI Governor Raghuram Rajan lifted interest rates three times since taking office in September, boosting returns to rupee investors and helping slow inflation to 8.8 percent in January, from 11.2 percent in November.

He boosted capital inflows by offering discounted foreign-exchange swaps for dollar deposits and debt raised by local banks. That helped increase foreign-exchange reserves by $20 billion, from September’s three-year low of $247 billion.

Dollar-based investors can make a return of 6.5 percent, including interest, by holding the rupee until the end of 2014, the biggest gain in Asia, according to data based on appreciation estimates and deposit rates compiled by Bloomberg.

“Current-account numbers have been the key driver because it’s a very transparent measure of whether the policy prescriptions are having an impact,” Philip Moffitt, the Sydney-based head of Asia-Pacific fixed income at Goldman Sachs Asset Management, which oversees more than $1 trillion, said in an interview. “If you can find something that’s relatively cheap and the fundamentals appear to be improving, it’s usually a good mix.”

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