Global fund managers raise Rupee bets

Global investors are getting increasingly positive on the rupee as the recent slide in commodity prices, coupled with improving domestic macros, has raised hopes of a resumption of foreign flows, which could benefit the local currency.

Last week, Nomura International exited its long USD/INR position – betting on the dollar strengthening vis-a-vis the rupee – and initiated a $1 million USD put / INR call spread positions to capitalise on a potential near-term improvement in investor perception, leading to a rupee rally.

And on Monday, Pacific Investment Management Company (Pimco) picked rupee as a preferred currency bet in Asia, given the currency’s sharp underperformance over the last two years and additional quantitative easing initiated by Bank of Japan.

“The rupee has almost a 6% yield in the NDF (non-deliverable forwards) and it’s a currency that has been beaten down quite severely in terms of valuation by the market,” Ramin Toloui, co-head of Pimco’s global emerging markets portfolio management team, said in an interview to Reuters.

According to Credit Suisse, while the rupee is among the better performing currencies year till date (7th out of 30 currencies) mostly due to aggressive money printing by developed countries, it has been among the weakest globally over the past two years (27th out of 30).

Craig Chan, head of forex strategy, Asia ex Japan at Nomura, expects rupee to gain from investor perception that a softer inflation backdrop would allow the Reserve Bank of India to ease rates further, while the fall in commodity prices will see a more sustained narrowing of the current account deficit (CAD) and lower inflation. 

But not all experts are convinced.

“We are a bit sceptical of the emerging all-troubles-over euphoria. After all,  history shows that episodes of risk off (risk on) not only pull down (push up) oil prices, but also dry up (pump up) capital flows. In fact, past data shows that the INR appreciates (depreciates) when commodity prices go up (come down),” Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, said in a note.

Neelkanth Mishra, head of research at Credit Suisse India, concurred. “The market is very positive on the fall in prices of crude oil and gold. The decline does help bring down CAD, all else being the same. But the net effect on the currency in our view is likely to be limited, as “all else” is unlikely to remain the same,” he said in a note.

The experts, however, see a resumption of capital flows as a big trigger for rupee.
“There remains a risk from the weak global growth backdrop and the lack of net foreign equity inflows, which has been close to zero since 1 April. The combination of lower inflation, RBI rate cuts, a narrower CAD and stronger global growth could lead to large foreign equity inflows. In a scenario in which low commodity prices are sustained and global growth rebounds in second half of 2013, we believe INR would perform strongly,” wrote Chan.

Mishra, too, sees portfolio capital flows – both foreign direct investment and foreign institutional investor – to pick up further, thereby supporting rupee.