Rupee is the worst performer in emerging Asia as RBI tries to lift economy

The RBI bought has about $18 billion of foreign exchange since the end of September.

Market News : The Reserve Bank of India’s efforts to support the flagging economy are turning out to be a bane for the rupee.

The currency is the worst performer in emerging Asia this quarter, and analysts say that’s because the central bank is mopping up dollars gushing into local stocks and bonds.

The RBI bought has about $18 billion of foreign exchange since the end of September, according to estimates by Bloomberg Economics. While the purchases have propelled reserves to a record, the rupee has fallen about 0.7% since Sept. 30.

Weakness in the rupee despite robust inflows is seen as a sign the central bank wants to curb a sharp appreciation in the currency that can hurt exports. With slew of data pointing to weak economic activity, boosting shipments is high on agenda for the government.

“Part of the rupee’s under performance is deliberate,” said Mitul Kotecha, a senior EM strategist at TD Securities in Singapore. “Higher reserves prove that the central bank is probably making determined efforts to keep the rupee’s competitiveness.”

The RBI has said it does not target any particular level of exchange rate and steps in only to curb undue swings in the currency. Though, as the rupee was heading for its worst quarterly decline in a year in the three months ended September, Governor Shaktikanta Das said September 19 that the currency is fairly valued, indicating tolerance for a weaker rupee.

India’s exports have shrunk for three months in a row, contributing to further deepening of a growth slowdown. A report on Nov. 29 is likely to show gross domestic product grew 4.6%, which would be the weakest pace of expansion since the first three months of 2013.

Expectations that the government will continue to take steps to revive growth has prompted foreign funds to pump $4.6 billion into local shares and more than $600 million into debt this quarter. The purchases have pushed up the nation’s main stock index to a record.

The central bank will continue to soak up the inflows to address the rupee’s overvaluation, according to Kotak Securities Ltd.

How corporation tax cut has made rupee carry trade more lucrative

Going long on the rupee with borrowed dollars offered the best returns in the past month in Asia.

The carry trade for the Indian rupee is getting boosted after a shock $20 billion tax cut by the government.

The corporate tax reduction announced on Friday has spurred $374 million of inflows into Indian stocks in three days, and supported the rupee. That’s adding to the attractiveness of the currency for carry-trade strategies, according to UBS Group AG and Kotak Securities Ltd.

With the world’s pile of negative debt almost doubling to $15 trillion this year, investors are increasingly employing currency-related strategies that allow them to squeeze more yields. Going long on the rupee with borrowed dollars offered the best returns in the past month in Asia.

“The corporate tax cuts are a response to mounting growth pessimism, and should stem Indian equity outflows,” said Rohit Arora, emerging market Asia strategist at UBS. “This, in our view, works well enough for the rupee carry trades and lower volatility in the near-term.”

Carry trades work by investors borrowing in a lower-yielding currency, such as the yen or the euro, and putting the money into one with higher rates. Indian sovereign bonds offer the second-highest yields among major bond markets in Asia.

Still, growing fears of a global recession have dented risk appetite for emerging markets, with returns from purchasing developing nation currencies with dollars easing since July, according to a Bloomberg index. India is also tussling with its slowest growth in six years.

“Domestic risks abated after multi pronged measures to boost growth made rupee a preferred carry currency,” said Anindya Banerjee, a currency analyst at Kotak Securities. Another trade in vogue is shorting the yuan and going long on the rupee to take advantage of the trade tension risks that the Chinese currency faces, he said.

Business Standard

A snapshot of market winners and losers from Lok Sabha elections 2019

Winners include cement companies, pipes, tiles and sanitary-ware manufacturers, capital goods and infrastructure companies.

Business Standard : A decisive mandate for India’s ruling coalition and a second term for Prime Minister Narendra Modi has assured investors of stability and policy continuity in Asia’s third-biggest economy.

Still, equity markets ended in the red after surging to an intraday record on Thursday as the result broadly matched investor expectations and was partly priced in after exit polls this week.

Political stability alone isn’t likely to drive continued outperformance by India’s equities or currency, with investors also weighing headwinds from softer domestic consumption, rising oil prices and a trade war. And valuations are already on the higher side: The benchmark S&P BSE Sensex trades at a 12-month blended forward price-to-earnings multiple of 18.3, above its five-year average.

“Markets are pricing in double-digit earnings growth over next few years. From a risk reward point of view, it is delicately balanced,” Nilesh Shah, chief executive at Kotak Asset Management Co., said in an email. “The direction will depend on steps that the government takes to accelerate growth.”

Here’s a snapshot of the winners and losers from India’s elections:

WINNERS

Agricultural Sector

In an interim budget in January, the government made clear that farmers are at the top of its agenda. The party aims to invest 25 trillion rupees ($359 billion) in rural development and offer farmers 6,000 rupees per year in income support. Also, it has planned increased spending on animal husbandry and fisheries.

Rural-focused companies including those providing seeds, pesticides, irrigation products, consumer staples and motorbike manufacturers stand to gain.

Infrastructure and Real Estate

During the campaign, Modi pledged to spend $1.44 trillion on repairing the country’s creaky infrastructure. Meanwhile, the government is already promoting affordable housing and has announced tax breaks to encourage buyers.

Winners include cement companies, pipes, tiles and sanitary-ware manufacturers, capital goods and infrastructure companies.