Rupee Slump Trips Fewer Alarms as Funds Say India Less Fragile

  • Asia’s third-largest economy overhauled since 2013 rupee rout
  • Oil slump helps narrow current-account deficit, cool inflation

A worker unloads a cage of chickens from a truck at the Ghazipur Wholesale Poultry Market. Asia’s third-largest economy has been overhauled since the rout in 2013, when a record current-account deficit, soaring inflation and weak growth led Morgan Stanley to include the rupee in its list of “fragile five” currencies.

Photographer: Prashanth Vishwanathan/Bloomberg

Global investors are keeping faith in India’s rupee bonds, even as the currency inches toward the record low reached in 2013, saying the nation’s finances have improved over the past 2 1/2 years.

Western Asset Management Co., which manages about $450 billion, says it has “very large overweight exposure” to India’s currency and debt. Amundi Asset Management said the market will remain stable despite global volatility. While the rupee has slipped to within 1.9 percent of the unprecedented 68.8450 a dollar reached in August 2013, strategists surveyed by Bloomberg predict it will strengthen to 67 by March-end.

Asia’s third-largest economy has been overhauled since the rout in 2013, when a record current-account deficit, soaring inflation and weak growth led Morgan Stanley to include the rupee in its list of “fragile five” currencies. Central bank Governor Raghuram Rajan boosted India’s foreign reserves by the most among major developing economies, a slump in oil prices improved external finances and inflation halved. The World Bank predicts India’s growth this year will be the fastest among the world’s major economies.

“The rupee is a completely different story today and has lost its fragile status,” said Viraj Patel, a London-based strategist at ING Groep NV, among the most accurate forecasters of the rupee in Bloomberg’s rankings. “The Indian economy is in a much better shape to withstand financial market turmoil. The favorable growth dynamic means that the rupee is not being viewed as a go-to short.”

India is the only country among the so-called fragile five with a positive outlook from Moody’s Investors Service. The ratings company has put Brazil on review for a downgrade to junk, while it has a negative outlook for South Africa and Turkey and a stable outlook on Indonesia.

The following five charts show the rupee’s forecast spot returns at the end of June, increase in foreign holdings of Indian bonds and stocks since 2013, narrowing of the nation’s current-account deficit to the smallest in seven years, slowing inflation and a surge in foreign reserves.


Rupee Spot Forecast Returns Top Asia

Investing dollars in rupees will earn 0.2 percent by the end of June, according to forecasts of 32 strategists. That’s the best spot return among 10 Asian currencies tracked by Bloomberg.

“The rupee should outperform other currencies in Asia this year in terms of returns,” said Roy Teo, a senior foreign-exchange strategist at ABN Amro Bank NV in Singapore. “The current weakness is due to risk aversion and once the sentiment improves, markets will look at India’s improving economic fundamentals and the rupee should recover back to 67 levels.”


While foreign funds have pulled money from local debt in January, their outstanding holdings more than doubled since August 2013 to 3.45 trillion rupees ($51.1 billion). Stock holdings have increased 19 percent to $164 billion in the period.

"India remains offering a fairly high yield and it’s quite stable even in this kind of volatile environment," said Raymond Lim, Singapore-based head of Asian bonds at Amundi Asset. The strength of the dollar is a concern across Asia, while the government’s budget will need to balance fiscal targets and the growth outlook, he said.


India’s current-account deficit narrowed to a seven-year low of $27.5 billion in the year ended March 2015, from a record $88 billion two years earlier. Citigroup Inc. estimates the shortfall will be $17.3 billion in the year ending March 2016.

“The smaller the current-account deficit, the less need for capital,” said Desmond Soon, Singapore-based head of investment management in Asia outside of Japan at Western Asset Management. “Indian reserves have been one of the few to have grown among the fragile countries.”


Consumer-price gains in India cooled to 5.6 percent in December, halving from their November 2013 peak of 11.5 percent, as a slump in crude prices benefited the nation that imports about 80 percent of its oil.


The Reserve Bank of India’s currency stockpile has risen about 32 percent to a near record $324.7 billion from a three-year low in September 2013. India is well placed to tackle volatility in capital flows, Governor Rajan said at the World Economic Forum in Davos on Jan. 20.

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