Photographer: Dhiraj Singh/Bloomberg

Rupee Doubters Emerge as Cracks Seen in India Macro Picture

  • Currency drops to weakest since April amid deficit concern
  • Risk is clearly to the downside for the next few months: Idris

The rupee’s status as one of the most-loved Asian currencies is being tested by India’s faltering economy and signs that its markets are overheating.

The currency slumped to its lowest since early April on Friday, weakening for a second day, amid worries that public finances will worsen as Prime Minister Narendra Modi’s government considers measures to boost growth after last quarter’s shock slowdown. Foreigners are dumping stocks at the fastest pace this year as weak earnings fail to justify the boom in share prices.

“The risk for the rupee is clearly to the downside for the next few months,” said Nizam Idris, Singapore-based head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. “It has gone a little flat as the Modi-motivated rally fades. This talk of stimulus, which may put to question commitments to fiscal consolidation, in itself reflects government concern that growth is going off track.”

That’s a turnaround for the rupee, which was one of Asia’s best-performing currencies in the first half of 2017. Its 4.4 percent gain this year has been fueled by global funds, drawn by the region’s highest bond yields, a sound economy and optimism that Modi will initiate more policy changes after implementing a nationwide sales levy -- touted as independent India’s biggest tax reform.

READ: ‘Frothy’ Assets Spark Concerns as Cash Floods Indian Markets

NatWest Markets Ltd. is cautious on the rupee going into the fourth quarter as rising inflation and the widest current-account gap in four years blur the economic outlook, while JPMorgan Chase & Co. said in a recent report that the risk-reward around owning the currency is not as “compelling” compared with other regional exchange rates.

Foreign funds have sold a net $761.6 million of Indian stocks in September, after pulling out $1.73 billion last month, which made for the biggest withdrawal since November. That’s at a time when India’s restrictions on overseas investment in its bonds are stalling inflows into debt.

Rising Forecasts

That said, the median rupee forecast for 2017-end has risen for an eighth straight month in September. Strategists at ING Groep NV and National Australia Bank Ltd. say the recent slowdown in growth will prove to be temporary and India remains one of the best emerging markets to invest in.

The rupee will end the year at 64 per dollar, according to the median of strategists’ forecasts compiled by Bloomberg. The median estimate was at 64.70 on Aug. 31. The currency fell as much as 0.5 percent on Friday to 65.1050, its weakest level since April 5. That followed Friday’s 0.8 percent slide, which was the biggest since May.

READ: Rupee Optimism Holds as Shock India Slump Worries Economists

For now, technical indicators suggest that the rupee could weaken further. The dollar-rupee has broken above its 100-day moving average for the first time since February. The pair’s MACD, a momentum indicator, also points toward a further advance.

“Whichever way you see, it’s really hard to find any positives supporting the rupee at this point in time,’’ said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch in Mumbai. “We see the dollar strengthening, current-account deficit widening and capital inflows slowing.’’

Following are some more comments on the currency outlook: 

  • Vaninder Singh (NatWest Markets, Asia economist)
    • Stimulus talk will focus investors’ minds on India’s emerging risks: equity positioning and valuations, current account/inflation/growth mix, and INR positioning broadly
    • “We expect the equity market to sell-off early next year as domestic accounts take profit and rate cut expectations are disappointed”
    • Expects INR “to further reverse the outperformance the currency has built up over the last few months against its major trading partners”
    • Sees rupee dropping to 66.6 in December quarter and 67.50 by 1Q of 2018
  • Idris of Macquarie:
    • December-end rupee forecast: 66 per dollar
    • “Widening the fiscal deficit would also likely see deterioration in current account deficits, reversing what has been good progress in recent months”
    • “The central bank too, under new management, has failed to instill confidence given recent flipping of policy stance”
  • Sen Gupta of BofAML:
    • Sees rupee at 66.75 by end-December
    • “RBI’s own intervention measures, mopping up dollars, won’t support rupee’s appreciation’’
  • Qi Gao (Scotiabank, currency strategist, in a note Friday)
    • Would like to buy USD/INR with a target of 66 if the pair rallies through the 65 resistance
    • In the medium term, INR will recoup its losses when the market is convinced of the proposed stimulus package’s ability to prop up economic growth

— With assistance by David Finnerty

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