Morgan Stanley Sees Worse Coming for Rupee, Asia's Biggest Loser

  • Predicts drop to 73 per dollar by end-2016 and 69 this quarter
  • Currency up 2 percent in March as India stock inflows climb

India’s rupee will drop to a record this quarter and retreat further to 73 per dollar by the end of the year amid weak global sentiment, Morgan Stanley predicted as it slashed its forecast for the currency.

The rupee “is likely to underperform in a risk-averse environment that we expect will continue to dominate fundamentals over the next few quarters,” Morgan Stanley currency strategists led by London-based Hans Redeker wrote in a report. Rupee “longs are crowded, and weakening risk appetite suggests that the equity-dominated capital inflows may ease from here.”

The currency is already Asia’s worst performer in 2016 despite a rally in March that propelled it to a two-month high on Monday. Morgan Stanley lowered its year-end estimate to 73 a dollar from 70, while predicting a fall to 69 by the end of this quarter. The firm joins UBS Group AG in forecasting that the rupee will weaken past an unprecedented 68.845 seen in August 2013, as investors debate whether recent gains in emerging-market assets will be sustained.

The rupee has climbed 2 percent this month, paring 2016’s decline to 1.4 percent, as foreign investors bought a net $1.5 billion of Indian stocks after two months of withdrawals. The currency rose to as high as 66.8750 a dollar in Mumbai on Monday, the strongest level since Jan. 13, before reversing gains to end 0.1 percent lower at 67.1050. The S&P BSE Sensex index of shares has jumped 7.8 percent in March after a four-month losing streak.

“While India’s fundamentals remain better than many of the emerging-market economies, given India’s low leverage and low exposure to China, we think that sentiment on investment has receded somewhat following a slower-than-expected pace of reforms,” Morgan Stanley strategists wrote in the note dated March 13. “The improvements in the current-account deficit are likely to slow down with commodity prices seeming to stabilize at a low base.”

Indian sovereign bonds rose, with the yield on notes due January 2026 falling three basis points to 7.60 percent in Mumbai, its lowest close in two months, according to prices from the central bank’s trading system.

With data forecast to show the inflation rate in February was near January’s 17-month high and real interest rates at the low end of Rajan’s range, Deutsche Bank AG and Societe Generale SA say there is little room to ease aggressively. Consumer prices probably rose 5.51 percent from a year earlier, according to the median estimate in a Bloomberg survey before official data due later on Monday. January’s reading was 5.69 percent.

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