Forecasters see India rupee rally fizzling

Budget restraints and looming elections are halting Indian currency’s rally from a record low, say analysts.

Bloomberg/Mumbai

The top rupee forecasters see budget restraints and looming elections halting the currency’s rally from a record low even as India’s external finances improve.

Canadian Imperial Bank of Commerce, ranked third, predicts a drop to 64 this quarter before a return to 62 by the end of the year.

The rupee surged 10.7% from a record 68.845 in August, the most among 24 emerging markets tracked by Bloomberg, as policy makers took steps to narrow India’s current-account deficit and attract foreign capital. Nomura said the economy could be buffeted by cuts in government expenditure to curb the budget shortfall, delays in corporate spending before national polls and increases in interest rates to cool inflation.

“There are still some headwinds,” Craig Chan, Nomura’s Singapore-based head of foreign-exchange strategy for Asia excluding Japan, said in an e-mail interview. While a global economic recovery and an improving balance of payments supports the rupee, he said, there are risks “related to inflation, monetary policy and the budget deficit.”

The rupee’s rebound from its Aug  28 low helped pare the currency’s 2013 decline to 11%. Indonesia’s rupiah slumped 20.8% last year in Asia’s worst performance. Nomura still recommends buying the rupee, noting this continued outperformance.

Global funds turned net buyers of Indian debt in December, after cutting holdings of the notes for the previous six months, exchange data show. The inflows helped finance the shortfall in the current account, which widened to a record in the fiscal year ended March.

The Reserve Bank of India predicts the gap will narrow to around $56bn in the year through March 2014, down from $88bn. The government curbed gold imports in the largest bullion consuming nation to rein in the deficit and RBI Governor Raghuram Rajan offered discounted swaps for dollars raised by banks to stabilise the rupee.

Financing the shortfall in the broadest measure of trade may become harder should investors pull money from India as the Federal Reserve unwinds stimulus, according to Macquarie Bank Ltd The forecaster, ranked fourth, predicts the rupee will weaken to 64 by end-March and 66 by end-June.

“The market may have overestimated India’s current-account healing process,” Nizam Idris, head of strategy for fixed income and currencies at Macquarie in Singapore, said in an e- mail interview yesterday. “While the deficit will ease, it will remain hard to finance when portfolio flows turn negative.”

A weaker currency is good for India as it can boost exports, according to Canadian Imperial, which predicts the rupee will stay between 61 and 64 for the rest of 2014.

The effects of the Fed’s taper will fade in the coming months and concerns about India’s budget deficit will pose the largest risk to the exchange rate, the lender said.

The budget shortfall reached 94% of the government’s full-year target in the first eight months of the current fiscal year, fueling concern Prime Minister Manmohan Singh’s efforts to avoid a junk debt rating are faltering.

The gap in government finances was 5.09tn rupees ($82bn) in the April- November period, official data showed December 31, compared with its full fiscal-year goal of 5.42tn rupees.

“The most important is the slippage in the fiscal account,” Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial, said in a Jan 6 telephone interview. “The elections are a cautionary note at the moment rather than being something which is discouraging. Monetary policy is in a decent state.”

Bennett recommends investors sell the rupee against the dollar around the 61.25 level. Borrowing costs shouldn’t be raised as inflation concerns will dissipate, he added.

RBI Governor Rajan unexpectedly kept the benchmark repurchase rate unchanged at 7.75% last month after raising it twice since taking office in September. India’s consumer prices rose 11.24% in November, official data show, compared with 3% in China. The RBI predicts the economy will grow 5% this fiscal year, matching the previous period’s gain that was the smallest in a decade.

Standard Chartered Plc this week lowered its inflation estimates for India and raised its outlook on the nation’s sovereign debt to positive from neutral.

The UK bank said data due Jan. 13 will show consumer prices rose 10% in December, less than its previous prediction of 10.4%, and recommends investors buy the 7.28% sovereign notes maturing in 2019.

The yield on the 10-year benchmark bond was little changed at 8.79% today, according to the central bank’s trading system. The rupee gained 0.1%, prices from local banks compiled by Bloomberg show.

Slower inflation will prevent a sharp selloff in the currency and India’s growth has likely bottomed, according to Legal & General Investment Management, which managed about 443bn pounds ($728bn) globally as of September.

“The rupee is more insulated from tapering-related risks than it was in 2013,” Brian Coulton, a London-based emerging- market strategist at Legal & General Investment, said in a January 6 telephone interview. “But I don’t necessarily see a big upside from where we are at the moment.”

Sensex falls before earnings season

Bloomberg/Mumbai

Most Indian stocks declined before the start of  the earnings season today. Lenders of gold-backed credit rallied after the central bank eased rules.

Engineering company Larsen & Toubro Ltd fell the most on the benchmark S&P BSE Sensex. Muthoot Finance Ltd and Manappuram Finance Ltd, the nation’s largest gold-loan lenders, surged by the limit 20%. Infosys Ltd, the country’s second-largest software exporter, climbed for the first time in four days before its results tomorrow.

About three stocks fell for every one that gained on the S&P BSE 100 index, which dropped 0.2%. The Sensex slid less than 0.1% to 20,713.37 at the close. The MSCI Asia Pacific Index declined for a fifth time in six days after US Federal Reserve minutes showed officials see the benefits of economic stimulus diminishing. India’s company earnings season begins tomorrow, when the government also will release November industrial production data December trade figures.

“The quarterly results could be a bit disappointing as expectations have got ahead of themselves,” Andrew Holland, chief executive officer at Ambit Investment Advisors Pvt. in Mumbai, told Bloomberg TV India. The December quarter “is seasonally weak for the software sector, so don’t expect any strong guidance” from Infosys, he said.

Fed officials judged that the “efficacy” of their record bond-buying programme was waning, according to a record of last month’s meeting released yesterday. Private-sector jobs data added to signs the US economy can withstand cuts to stimulus.

Infosys may report net income of Rs 27bn ($435mn) for the quarter ended December 31, according to the median estimate of 31 analysts in a Bloomberg survey.

That compares with Rs 23.7bn in the same period a year earlier. Its shares rose 0.7% to Rs 3,450.80, its first advance this week.Larsen & Toubro decreased 2.7% to its lowest level since November 22. The stock had rallied 36% in the last quarter of 2013. Lender Axis Bank Ltd fell 2.2%, its seventh day of decline. State Bank of India, the nation’s biggest lender, dropped to its lowest level since October 17.

Muthoot Finance, the biggest lender in India, rallied the most since August.

Rupee halts two-day gains

India’s rupee halted two days of gains as investors preferred the dollar before US jobs data, which economists predict will support the Federal Reserve’s move to cut stimulus that fueled inflows to emerging markets.

The US 10-year Treasury yield rose five basis points, or 0.05 percentage point, yesterday as minutes of the December 17-18 Federal Open Market Committee meeting showed officials judged the efficacy of their record bond-buying programme was diminishing. Losses in the rupee, which declined 0.5% last week, will be limited as India’s inflation eases and economic growth accelerates, according to Citigroup Inc

“A continued uptick in US Treasury yields could put some pressure on high-yielding currencies such as the rupee,” analysts at Citigroup, including Rohini Malkani in Mumbai, wrote in a research report . The rupee ended at 62.0775 per dollar in Mumbai yesterday.