Goldman Sees Rupee Selloff Curbed as Investors Look Beyond Rajan

  • India reform ‘more than the work of one man,’ Aberdeen says
  • Nation’s fundamentals better than most emerging peers: Goldman

International investors predict India’s rupee and bonds will be resilient to central bank Governor Raghuram Rajan’s impending departure even as the local currency dropped against all its emerging-market peers Monday.

HSBC Global Asset Management is overweight the nation’s sovereign notes while Goldman Sachs Group Inc. said India’s strong economic fundamentals should help limit the extent of any rupee selloff. Moves on Monday lent credence to that view, with the rupee recouping more than half of its morning losses versus the dollar by the close of trading, government notes reversing declines and the benchmark stock gauge rallying.

“Rajan will be missed but he is not irreplaceable,” Kenneth Akintewe, senior manager at Aberdeen Asset Management Plc in Singapore, wrote in an e-mailed statement. “The impact of Rajan’s departure should not be overstated. Reform in India is more than the work of one man.”

Since a market meltdown in 2013 that sent the rupee to a record low, India’s dependence on external funds has fallen, its inflation rate has slowed and the central bank has built record currency reserves to guard against volatility. Five candidates, including one of the monetary authority’s current deputy governors, and two former ones, are in the running to take over from Rajan when his term ends on Sept. 4, according to a government official who asked not to be identified.

The rupee ended 0.3 percent lower in Mumbai on Monday, after slipping as much as 0.9 percent earlier to 67.66, its weakest level since May 24. It fell 0.3 percent to 67.5275 a dollar on Tuesday. The currency has slumped 2 percent this year in Asia’s worst performance. Indian stocks rose with the rest of the region on Monday as polls showed the U.K. camp for leaving the European Union losing traction. The yield on India’s 10-year bonds fell one basis point to 7.49 percent at the close, after rising to high as 7.55 percent. It was AT 7.50 percent on Tuesday.

Rajan, who took charge within days of the rupee’s tumble to a record during 2013’s taper tantrum, helped lift the currency and curb its swings by more than half. He also joined forces with Prime Minister Narendra Modi’s government to set up an inflation-targeting framework. On Monday, the RBI chief defended his monetary policy against critics who want to see lower interest rates and called on his successor to continue fighting inflation after he leaves in September.

Carry Candidates

All of that, along with India’s world-beating growth, improvements to its current-account and fiscal deficits, and economic reforms have burnished the appeal of the nation’s assets. Modi’s administration on Monday said it will allow foreign entities such as funds and portfolio investors to fully own local airlines in a bid to lure investment into Asia’s third-biggest economy.

“The current Indian economic picture shows fundamentals are better than in most of the emerging-market world, with low inflation, a low and manageable current-account deficit, a significant reserve buffer and improving growth,” Andrew Tilton, the chief Asia Pacific economist at Goldman Sachs in Hong Kong, wrote in a report. “This is why the rupee has been one of our favored ‘good carry’ candidates.”

Borrowing in dollars to purchase rupee assets earned 3.4 percent in the past two years, the highest carry trade returns in Asia after Indonesia, data compiled by Bloomberg show. Foreign funds have poured a net $2.8 billion into local shares in 2016, a fifth straight year of inflows, while overseas holdings of rupee-denominated debt surged 2.2 trillion rupees in the last two years before falling by 125 billion rupees ($1.9 billion) in 2016.

Rajan on Saturday expressed confidence that the policies he helped implement would protect India from the sort of sudden capital flight that occurred in the months before he took office. “I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit,” he said while announcing his plans to leave office.

‘Bump in The Road’

“We remain optimistic on bonds,” Anders Faergemann, a London-based senior portfolio manager at PineBridge Investments, wrote by e-mail. “Rajan was clearly associated with the improvement in India’s institutional framework and the resulting decline in currency volatility. Hopefully, the process is fully institutionalized and the government will understand the importance of selecting a successor with the same credentials as Rajan, ensuring his departure will be viewed as a bump in the road.”

Two finance ministry officials, Economic Affairs Secretary Shaktikanta Das and Chief Economic Adviser Arvind Subramanian, are also among the candidates for Rajan’s job, the government official said on Monday, adding that Modi and Finance Minister Arun Jaitley will decide on the next governor. Another official, who also asked not to be identified, told reporters that the decision may be announced before August.

“We have not changed our investment strategy given this development though we are keenly watching the appointment of the successor,” said Gordon Rodrigues, the Hong Kong-based head of Asian rates and currencies at HSBC Global Asset. “As long as fiscal prudence continues amid the institution building that has been put in place, bonds should stay well supported.”

‘Come and Go’

A gauge of one-month implied volatility in the rupee jumped 37 basis points to 7.05 percent on Monday, its highest close since February. It fell 22 basis points on Tuesday. Investing in rupees will earn 2.6 percent, including interest, by the end of 2016, the highest total return in Asia, according to estimates compiled by Bloomberg.

“The initial shock will come and go,” said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset Global Investments Co., which manages $83 billion worldwide. “Impressive economic growth, improvement in finances, a high carry, subdued current-account deficit and potential for reforms will keep India at the forefront of investors’ focus.”

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