The biggest interest-rate increases among Asia’s largest economies may turn the Indian rupee into the region’s best-performing currency as investors gain confidence in the central bank’s efforts to damp inflation.
The currency, whose 0.76% total return this month is Asia’s best performance, will gain 13% by the end of June 2012, according to the median estimate of 10 analysts surveyed by Bloomberg in the past month. Benchmark bonds are headed for their first monthly gain since January as Europe’s debt crisis clouds the outlook for the world economy, with the 10-year yield falling 20 bps to 8.21%.
Any further increase in borrowing costs must take into account the impact of “recent global developments” on domestic growth, the Reserve Bank of India said last week after raising rates for a tenth time in 15 months. The yield on India’s notes due in a decade is more than two times the rate in the UK and almost three times that in the US.
“I have started to buy a bit of bonds in India as the yields are at more-attractive levels as we are now approaching the end of the rising interest-rate cycle in India,” said Philippe Petit, a senior investment manager in Singapore at Pictet Asset Management. “The prospects of slower growth and an eventual decline in inflation also add to the medium-term appeal.”
Growth in the South Asian economy may slow, which “may be unavoidable in bringing inflation under control,” the RBI said on June 16, when it raised the repurchase rate by 25 bps to 7.50%. The central bank has raised its lending rate by 250 bps since the start of March 2010, the most of any monetary authority in Asia’s 10 biggest economies.
Excluding interest-rate returns, the rupee will appreciate 2.1% to 44 per dollar by the end of June 2012, according to the median forecast of analysts surveyed by Bloomberg. The median prediction has climbed to 44 from 45.5 on June 9 as strategists led by Standard Chartered updated their forecasts. The currency, which gained 0.1% to 44.95 per dollar on Tuesday, will reach 42 by the end of this year, according to HSBC Holdings.
“We do like the rupee very much,” Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds in Frankfurt, said. “The RBI is the frontrunner and has been more proactive than central banks in Malaysia, Indonesia or the Philippines due to inflation.” Union Investment has added to holdings of the rupee this quarter, he said.
This month’s rally in India’s bonds was stoked by data on June 1 that showed exports grew 34% in April, the slowest pace in three months. A day earlier, government data showed GDP rose 7.8% in the three months ended March, the least in five quarters. The yield on the 7.8% securities due April 2021 rose for the first time in four days on Tuesday, gaining 2 bps, according to RBI’s trading system.
Global funds boosted ownership of India’s debt by $6.6 billion to $20.9 billion in the past year as the difference in yields between India’s notes due in a decade and similar-maturity securities in the US widened 91 bps to 525. Rupee bonds have returned 1.5% this month, the best performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings.
The spread between India’s one and 10-year notes has narrowed to 13 bps from this year’s high of 79 bps. The yield curve is a gauge of investors’ expectations on inflation and economic growth.
“By the end of July, we see some decent opportunities to make allocations into the rupee,” Kenneth Akintewe, a Singapore-based money manager at Aberdeen Asset Management, said. “Indian bonds are attractive from the point of view of relative yields in the region. If you could freely allocate funds at the short end of the curve without any restrictions, that would be an attractive trade.”
Aberdeen has exhausted the Indian government-imposed investment quota in rupee debt, he said. The South Asian economy allocated investment limits for R7,500 crore ($1.7 billion) of government bonds and R2,700 crore of corporate notes to foreign investors at an auction on March 15, according to Sebi.
“The rupee will appreciate because inflation should begin to come off by the end of the year and the rate-hike cycle should be largely behind us,” Priyanka Kishore, a foreign-exchange strategist at Standard Chartered, said.
Bloomberg, Financial Express, Jun 22, 2011,
http://www.financialexpress.com/news/rupee-emerging-as-best-performer-on-rate-allure/806809/0
