Rupee Rally Nobody Saw Coming Sees Strategists Play Catch Up

  • Citi, Barclays, Nomura among banks to raise year-end forecasts
  • Most analysts still see currency weakening later in the year

Strategists are scrambling to raise their year-end forecasts for India’s rupee after the biggest quarterly gain in more than four years took them all by surprise.

Citigroup Inc., Credit Suisse Group AG and Barclays Plc are among at least eight global banks to upgrade their estimates in the past three weeks. The rupee jumped 2.8 percent in March to cap its best monthly gain in a year, thanks to a surge in foreign inflows following a win for Prime Minister Narendra Modi in key state elections. Its 4.7 percent advance last quarter is the largest since September 2012.

“The rupee’s strength likely caught the market by surprise, and was largely guided by inflows into Indian assets, broad dollar weakness and tapering of expectations of U.S. policy” tightening, said Dushyant Padmanabhan, a currency strategist at Nomura Holdings Inc. in Singapore. “We expect bond inflows to continue while the growth outlook should support broader inflows, and hence will be positive for the rupee.”

From estimates of as low as 70.8 to a dollar earlier, the banks’ year-end rupee forecasts now range from 64.50 to 68, data compiled by Bloomberg show.

ForecasterNew Estimate for end-2017
(Rupees per dollar)
Previous Estimate (Rupees per dollar)
Barclays6770.8
Credit Suisse66.3368.85
Nomura6870.20
Citigroup67.1069.10
ANZ67.5069.50
HSBC67.5069
MUFG64.5066.75
Mizuho Bank6565.50

The rupee climbed 0.2 percent to 64.8825 per dollar in Mumbai on Wednesday. The new estimates indicate that most of the forecasters expect the currency to weaken from here. Interest-rate increases by the Federal Reserve will spur flows back to the U.S. dollar, according to the strategists.

Some of them also expect intervention by the Reserve Bank of India -- which during this rupee surge appears to have grown more tolerant of currency gains -- to intensify in case more money flows into the nation’s assets.

“The global backdrop has been positive for EM currencies, particularly high-yielders like India, and the outcome of state elections has given, from the perception of foreign investors, a green light for further reforms by PM Modi,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays in Singapore. “On top of that, it does appear that the stance of the central bank has changed with regard to limiting or capping INR gains.”

Foreign holdings of rupee-denominated government and corporate bonds climbed by about 360 billion rupees ($5.5 billion) last quarter, with 272.6 billion rupees coming in March alone, the most for any month in National Securities Depository Ltd.’s data going back to mid-2011. Overseas funds poured $6.7 billion into Indian stocks in the January-March period, of which $5.1 billion came last month.

“I was surprised at how much it has appreciated,” Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd., said of the Indian currency. “The question now is whether the inflows will sustain to keep the rupee strong.”

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