Rupee’s Reign as Top Asia Carry Seen Riding Out U.S. Risks

  • Expected swings in India currency drop to least in eight years
  • Rupee forecast to deliver total return of 7.7% by end of 2017

Asia’s highest bond returns, the lowest currency volatility in eight years and the world’s fastest growth among major economies are burnishing the appeal of the region’s best carry trade -- India.

The rupee’s Sharpe ratio, which gauges returns from borrowing in dollars to buy the currency adjusted for price swings, was 1.6 in the past one month, the most among 11 Asian exchange rates tracked by Bloomberg. The rupee is seen delivering returns of 7.7 percent by the end of 2017, the highest in Asia after Indonesia’s rupiah. Scotiabank, Goldman Sachs Group Inc. and BlackRock Inc. are among bulls on Indian fixed-income bets.

Expected rupee swings over three months are at the lowest since 2008, even with a gauge of global currency volatility rising to the highest in almost two months on prospects Republican nominee Donald Trump will win U.S. presidential elections and impose protectionism just as the Federal Reserve tightens monetary policy. The central bank’s intervention and India’s improving economic fundamentals have ensured rupee stability despite repeated global shocks.

“The rupee is the best candidate to deliver the highest carry returns next year,” said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “If Trump wins, risk-aversion will see emerging-market Asian currencies decline, but the rupee is likely to outperform regional peers in terms of depreciating less.”

The rupee declined just 0.3 percent in October even as investors sold $1.8 billion of stocks and bonds and Scotiabank estimated $7 billion of maturing foreign-currency deposits added to outflows.

Besides the high carry, a narrower current-account deficit and slowing inflation that enabled the RBI to cut rates to a five-year low also made Indian assets attractive. Rupee sovereign debt has handed investors a return of 8.1 percent in the past six months, the highest in emerging Asia, Bloomberg indexes show. India’s government predicts the economy will expand as much as 7.75 percent in the year through March 2017.

“Strong growth will attract capital inflows and the potential for more rate cuts will make government bonds look fairly attractive,” said Julian Wee, a senior market strategist at National Australia Bank Ltd. “The rupee’s high carry and very narrow current account deficit should put the rupee in good stead” and we expect “the rupee should offer the highest carry gains over 2017.”

National Australia Bank sees the rupee rising to 66.50 per dollar by end-2016, compared with the median forecast for a decline to 67.13 in a Bloomberg survey. The rupee, which rose 0.1 percent last week, fell by a similar margin to 66.7375 Monday. The Reserve Bank of India’s efforts to curb any undue currency swings will also help keep the rupee stable in the face of expected higher volatility after the potential increase in interest rates by the Fed, according to National Australia Bank.

To read more on RBI’s efforts to curb currency volatility, click here.

The rupee’s three-month implied volatility, used to price options, slid to 5.23 percent on Monday, the lowest since February 2008, data compiled by Bloomberg show. In contrast, the JPMorgan Chase & Co. index of global currency volatility rose to 10.5 on Monday, the highest since Sept. 15.

“The RBI looks set to keep the rupee in a fairly stable range, which will prove attractive against the backdrop of higher volatility in the immediate aftermath of the next Fed hike,” said Wee of National Australia Bank. “The rupee’s high carry should put it in good stead. A Trump win though will likely hit all EM currencies hard but we expect that the currencies of economies with strong fundamentals will be the earliest to recover from the setback.”

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