This marked a rapid turnaround for India’s currency—making it go from Asia’s best performer to its worst in two weeks.
A rebound in prices of oil, which is the nation’s top import, and concerns about an expensive bailout for farmers before general elections to be held by May has caused the rupee to miss out on a revival in emerging currencies. Instead, funds are being piled into the Indonesian rupiah and Chinese yuan on optimism over trade talks and signs of a Federal Reserve rate hike pause.
Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore stated that the rupee “may be leading the divergence within EM Asia and unless oil’s trajectory changes it will be a short.”
The currency will trail Asian peers “as oil’s amplified effects via inflation, current account and fiscal channels are bumping up against renewed concerns about fiscal slippage from farm waivers.”
The rupee has slid about 1% versus dollar this year after posting the best quarterly gain since March 2017. The Bloomberg JPMorgan Asia Dollar Index and almost all regional currencies have strengthened, led by the rupiah and the Thai baht.
Goldman Sachs Group Inc. predicts the rupiah to outperform the rupee because of diverging impact of oil prices, portfolio flows and monetary policy sensitivities to the US Federal Aberdeen Standard Investments, which held $384bn global assets in June—and is advising investors to sell Indian government bonds and pile into Philippine debt.
A Bloomberg survey of analysts forecast a drop to 71.10 per dollar by March 31. Mizuho Bank sees the currency’s drop extending to 72.50 by end-March, while ING Group expects it to test 73 levels during the period. The rupee was little changed at 70.4125 on Thursday.
Prakash Sakpal, economist at IGN Groep NV in Singapore stated that the rupee “may continue to under-perform Asia like what happened last year when Asia’s most oil-dependent currencies, including IDR and PHP, were hit hard.”
“However, domestic factors are more prominently negative for INR this year than last.” Sakpal added.
Indie relies on imports to meet about 80% of its energy needs and higher costs can unsettle the fiscal math. Every $10 rise in oil prices widens the current-account gap by $12.5bn, or 43 basis points of the GDP. It also bumps up inflation by 49 basis points, according to a central bank study.
The rupee’s decline is also accentuated by deepening bond losses, triggered by worries that the ruling party may bust its fiscal deficit target through populist measures to boost chances of re-election after suffering electoral losses in three key states last month.
The yield on 2028 bonds, the most traded, climbed to 7.52% rebounding from a nine-month low of 7.22% in December. Meanwhile, the rupee’s three-month historical volatility is now the highest among major Asian nations.
“With the risk of fiscal slippage rising, bond market is nervous and that’s getting transmitted to the rupee,” stated Anindya Banerjee, a foreign-exchange analyst at Kotak Securities in Mumbai.