Photographer: Dhiraj Singh/Bloomberg

Rupee Optimism Holds Despite Shock Slowdown in India Growth

Updated on
  • March-end median INR forecast up for sixth month in September
  • Citi, UBS among global banks to cut FY18 growth estimates

The shock slowdown in India’s growth has economists rushing to cut their estimates for the end of the year. Their pessimism isn’t shared by currency strategists who are raising forecasts for the rupee.

Citigroup Inc. and UBS Group AG are among global banks that have lowered their estimates for India’s growth after the latest data showed gross domestic product in the June quarter rose at the slowest pace since 2014. Even so, the median rupee forecast for end-March is rising in September for a sixth straight month.

“Investors are more inclined to view this GDP miss as a blip, rather than a deteriorating signal over the macro backdrop in India,” said Viraj Patel, a London-based foreign-exchange strategist at ING Groep NV. The rupee “certainly stacks up as one of the best among Asian FX, given the combination of a robust macro outlook, low external financing risks and low political risks.”

The jury is still out on how long the slowdown in India’s growth will last given it’s been at least partly triggered by one-time events such as the government’s unprecedented currency ban in November and the disruption caused by the July 1 implementation of a nationwide sales tax. Currency investors need to weigh the domestic softening against broad weakness seen in the U.S. dollar this year, which has supported the rupee.

The Indian currency has climbed 6.1 percent in 2017, with the bulk of its gains coming in the first half of the calendar year. It has weakened about 0.2 percent so far in September to 64 per dollar on Wednesday, after rising 1.1 percent in the last two months.

The median of estimates compiled by Bloomberg shows the rupee will end the financial year at 64.50, as against the 64.70 forecast at the end of August.

The case for a downward revision to growth has intensified “with weaker than expected first-quarter GDP data, reduced space for fiscal spending and emerging concerns on consumer confidence,” Citigroup economists Samiran Chakraborty and Anurag Jha wrote in an Aug. 31 report, lowering their estimate for GDP growth to 7 percent from 7.5 percent.

Such revisions come at a time when there are already signs that overseas demand for Indian assets is waning. Concern over equity valuations and geopolitical risks surrounding the Korean peninsula saw global funds pull out $1.73 billion from Indian stocks in August, the biggest outflow in nine months. They have withdrawn another $617 million so far this month.

READ: Patel May Hold Bond Quotas as India Faces Impossible Trinity

August’s rise in foreign holdings of rupee-denominated government and corporate bonds, at 126 billion rupees ($1.97 billion), was the smallest since February, as investors use up almost all of their eligible quotas to buy bonds.

That said, strategists including those at ING and National Australia Bank Ltd. point out that India remains one of the fastest-growing major economies in the world. A strong political mandate should allow Modi’s administration to implement more policy changes to revive expansion, they say, adding that Asia’s best carry and total returns as well as the prospect of at least one more interest-rate cut should keep investors interested in rupee assets.

At 6.58 percent, India’s benchmark 10-year bond yield is the highest among major Asian markets and the rupee is among the least volatile emerging-market currencies. Borrowing in dollars to purchase rupee assets has earned 9.9 percent in 2017, the best carry returns in Asia, data compiled by Bloomberg show. The rupee tops the region on a total-return basis as well.

Societe Generale SA said earlier this month that the currency is its top pick in Asia on a total-return basis, while HSBC Holdings Plc said India’s economic reform story remains intact, which should sustain foreign direct investment.

RECENT REFORMS:
*Implementation of a nationwide goods and services tax
*Passage of the Insolvency and Bankruptcy Code
*Setting up of a Real Estate Act to protect home buyers’ interests
*Helping set up a monetary policy panel to review rates

Bloomberg Intelligence predicts the currency will strengthen to 61 per dollar by March. ING has raised its end-2017 rupee forecast to 63.50 and sees it at 62.50 at the end of March.

Patel cited the “RBI’s strong desire for stability,” for recent revisions, adding that the risk of a “broader move toward 60 is high.”

“India is one of the best placed in the EM space,” said Julian Wee, a senior market strategist at National Australia Bank in Singapore. “Politically, there is little risk. Its fundamentals are also pretty strong. The U.S. dollar remains weak overall, and the rupee still retains a large interest-rate differential buffer against it.”

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