Rupee Seen Extending World’s Best Gain on Modi Win: India Credit

Aberdeen Asset Management Plc, Mirae Asset Management Co. and Nomura Holdings Inc. predict the rupee will extend a world-beating rally as India’s clearest election verdict in three decades boosts confidence.

Narendra Modi’s Bharatiya Janata Party got 282 of 543 parliamentary seats in the world’s biggest-ever vote, compared with 272 needed to form a government, as voters punished the incumbent Congress party for graft scandals and the worst economic slowdown in a decade. The rupee surged 2.6 percent in the past six days to 58.48 per dollar, the best performance among 78 global currencies tracked by Bloomberg.

The BJP has garnered the first single-party majority since 1984 and that’s boosting bets the new administration will pursue policies to improve the economy without being constrained by coalition politics, according to Deutsche Bank AG. Nomura, the second-most accurate rupee forecaster in the last four quarters, and Aberdeen Asset see the currency rising toward 57 per dollar by year-end, while Mirae Asset predicts a rally to 55.

“The election result was clearly better than we expected,” Craig Chan, Nomura’s Singapore-based head of currency strategy for Asia ex-Japan, said in a May 16 e-mail interview. “The outlook for reforms, potential foreign inflows and growth prospects will be even more positive now.”

More Bullish

Japan’s largest brokerage is projecting bigger rupee gains now than it did in April, when it had estimated the currency would end the year at 59.5. The exchange rate has rebounded 17 percent from a record low of 68.845 reached last year, when India’s slowing growth, relatively high inflation and current-account deficit fueled capital outflows.

The rupee’s recovery from last year’s slump was powered by Prime Minister Manmohan Singh government’s efforts to narrow the current-account gap and the central bank’s measures to rein in price pressures. The shortfall probably shrank to $35 billion in the year through March from an unprecedented $88 billion in the preceding period, Finance Minister Palaniappan Chidambaram said last quarter. Wholesale inflation slowed to 5.2 percent in April from 7.5 percent in November after the Reserve Bank of India raised interest rates three times since September.

International investors, who pared holdings of rupee debt by a record $8 billion in 2013, have already plowed back $5.3 billion so far this year, according to exchange data. Aberdeen Asset and Mirae Asset see inflows into bonds increasing after the BJP-led National Democratic Alliance’s victory.

‘Strong Position’

“With such a strong showing, the BJP and the NDA alliance are obviously in a strong position to make crucial progress on the various reform areas,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen, which oversaw $541 billion as of March, said in an e-mail interview on May 16.

A decisive election victory for the BJP would be a “catalyst” for a long-term advance in the rupee toward 40 to 45 per dollar, Adam Gilmour, Citigroup Inc.’s head of Asia-Pacific currency and derivatives sales, said in a March 12 interview in Singapore.

A potential pickup in fund inflows after the election will probably drive the 10-year government bond yield to 8 percent, a level last seen in July, as long as inflation doesn’t quicken, according to Mirae Asset. The rate on the benchmark 8.83 percent notes due November 2023 was little changed today at 8.83 percent in Mumbai.

Inflows Seen

“India will see more positives emerging and foreign inflows rising after this election result so long as the government and the central bank work in tandem,” Kim Jin Ha, a global fixed-income fund manager in Seoul at Mirae, which oversees about $59 billion, said by e-mail on May 16.

While the election results have buoyed optimism about India’s policies, the central bank may restrain exchange-rate gains that would threaten the nation’s exports, Sameer Goel, Deutsche Bank’s head of Asian interest-rate and foreign-exchange research in Singapore, said in a telephone interview on May 16.

The RBI intervened in the foreign-exchange market on May 16 to curb currency volatility, limiting gains in the rupee, according to four traders who asked not to be identified because the information isn’t public. India’s currency reserves have risen by $39 billion from a three-year low in September to $314 billion, the latest official figures show, signaling the monetary authority has bought dollars.

Central Bank

RBI Governor Raghuram Rajan said in an interview with the Mint newspaper published last month that a rupee level of 55 per dollar would be “too strong.” He said a study by economists at the finance ministry had suggested a range of 60 to 62 was “reasonable,” after taking into account inflation and export competitiveness.

“There are still uncertainties regarding the longer-term policies of the new government and whether” improvements in external finances and inflation can be sustained, Paul Mackel, head of Asian currency research in Hong Kong at HSBC Holdings Plc, said in a phone interview on May 16. “The central bank has been more inclined to smooth exchange-rate volatility and I think a combination of those factors will encourage the rupee to slowly drift lower towards the end of this year.”

Bond risk in India is falling. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years fell 41 basis points last week to 208, according to data provider CMA.

“It certainly looks like the near-term bias will be for the rupee to appreciate further,” Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp., said in a phone interview on May 16. “For the next one or two weeks, we are going to be in an euphoria mode and that will drive the dollar down in India. I think the RBI will use this as an opportunity to accumulate foreign-exchange reserves and smoothen volatility, but that will not stop the trend.”

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