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.

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Anti-patriotic': RSS wing says India must not issue foreign currency bonds

They say it is anti-patriotic as it could create long-term risks for the economy, potentially allowing rich foreign nations and their financial institutions to dictate the country's policies.

An influential Hindu nationalist group close to Prime Minister Narendra Modi's ruling party has demanded his government review its plan to raise money by selling foreign currency bonds.

They say it is anti-patriotic as it could create long-term risks for the economy, potentially allowing rich foreign nations and their financial institutions to dictate the country's policies.

"We can't allow this to happen," declared Ashwani Mahajan, the co-convenor of Swadeshi Jagran Manch (SJM), the economic wing of the Rashtriya Swayamsevak Sangh (RSS).

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The RSS was the key founder of the ruling Bharatiya Janata Party and has people it nurtured in top positions in the government, including Modi himself.

Declaring that the SJM will campaign against the plan by convening meetings of influential economists, Mahajan said: "We are confident that government will withdraw its decision on these bonds."

"We must look at the experience of countries that have taken loans from international markets to meet their government deficit. The experience of these countries has been far from good," he said, citing Argentina and Turkey as examples.

Mahajan said going overseas to borrow may mean that the rupee currency depreciates at a faster rate and allows foreign governments to demand tariff reductions.

A Finance Ministry spokesman declined to comment for this story.

Speaking at a business summit in London, British Prime Minister Theresa May expressed hope that the Indian government would choose the British capital as the location to issue its first international sovereign bonds.

New Delhi has not so far given any details about where they will be issued.

Subhash Chandra Garg, the top official at the Finance Ministry, told Indian business leaders last week that the overseas debt move was part of efforts to bring down real interest rates for Indian firms, to help the economy grow faster.... : Like it or not, gene