JPMorgan Calls for Rupee Weakness to Keep Pace With China

  • Rupee’s real-effective exchange rate hit record in December
  • Policy makers need to ensure India isn’t priced out, Puri says

The Reserve Bank of India should let the rupee weaken as advances in the past two years against a currency basket of trading partners risk undermining exports, according to JPMorgan Chase & Co.

A 3 percent to 4 percent depreciation of the rupee against the dollar this year would bolster shipments and support the economy, said Brijen Puri, JPMorgan’s head of markets for India. Policy makers would want to ensure that China, and other trade partners, isn’t gaining a “disproportionate” advantage from a weaker currency, he said in an interview.

Puri is weighing into a debate between India’s trade ministry, which has been pitching for a weaker rupee to support exports, and an inflation-targeting central bank. The slide in China’s yuan, which has drawn the ire of U.S. president-elect Donald Trump, is also spurring concern among trading partners and competitors in Asia.

“Given the requirement to remain competitive in global trade, it may be appropriate to allow the rupee to move to a slightly weaker level than what pure short-term flows would dictate,” Puri said in Mumbai. The government needs to ensure that India isn’t “priced out of global trade,” he said. 

See here for JPMorgan’s view on India bond markets

An index of the rupee’s real-effective exchange rate touched a record high of 116.75 in December, rising 3.4 percent in 2016 from a year ago. The index comprises a trade-weighted currency basket of 36 trading partners monitored by the RBI and adjusted for inflation. China’s yuan is the third-biggest component in the basket, after the U.A.E.’s dirham and the euro, as per RBI’s weights for 2013-14.

“We believe this is something the RBI or the government is unlikely to allow on a sustainable basis and some degree of INR weakness may be warranted,” Rohit Garg and Adarsh Sinha, analysts at Bank of America Merrill Lynch, wrote in a Jan. 13 note, referring to the index’s strength.

A 3 percent depreciation would take the rupee to about 70 against the dollar from the 67.9250 level it ended last year. The median estimate of analysts surveyed by Bloomberg is for the currency to weaken to 69.06 by the end of 2017. The rupee was down 0.1 percent to 68.17 per dollar as at 12:13 pm in Mumbai Thursday.

"Make in India’’ is among Prime Minister Narendra Modi’s flagship programs to expand manufacturing and create jobs. Yet, the country’s export performance in the past two years may spur the government to consider pruning a target to double exports of goods and services to $900 billion by 2020 from 2015, The Hindu BusinessLine newspaper reported on Dec. 22, citing a commerce ministry official. The mid-term review of the five-year trade policy, to be announced in 2017, will probably set a much lower target, the report said.

The rupee dropped 2.6 percent against the dollar last year, less than the South Korean won, the Malaysian ringgit, the Philippine peso and the Chinese yuan. China’s currency was the worst-performer in Asia last year, sliding 6.5 percent against the greenback.

“Our current account deficit is very manageable and we have a reasonable balance of payment surplus,” said Puri. “There is no real pressure for rupee to depreciate based on the flows situation by itself.”

The RBI has been intervening in the foreign-exchange market through state-owned lenders to limit the rupee’s decline, joining other Asian central banks which are also seeing capital outflow after Trump’s election victory and an interest rate increase by the Federal Reserve.

“There could be the temptation to let the INR depreciate rather than losing FX reserves,” Citigroup Inc. analysts wrote in a Jan. 9 note.

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