Rupee Cushioned Against Stronger U.S.Dollar - Barron's Asia

        By Christy Tan
        An Upbeat India
        We maintain the view that the Indian rupee is probably better cushioned against the global USD recovery. From the macro perspective, India looks well positioned to register a higher growth performance in 2015. Our India economist John Sharma expects GDP to improve from 5.3% in 2014 to 6.3% in 2015. Even the IMF (International Monetary Fund) has revised 2014 growth forecast for India higher to 5.8%. The overall improvement hinges on government reforms. Accordingly, NAB Economics is forecasting 75 basis points (bps) worth of cuts in the policy rate during 2015, bringing the Repo rate (repurchase agreement rate) down to 7.25% by the end of 2015. Risks to our interest rate projections include limited progress on fiscal consolidation, a weak monsoon and possible re-emergence of higher fuel & commodity prices.
        With regard to the timing, we believe the current favourable 'base-effects' are expected to reverse over the next couple of months. The RBI will likely wait to see how inflation outcomes materialise over the next few months, before cutting rates. We don't rule out the possibility of a cut either in February, or a non-scheduled cut in March (post-Budget), if inflation surprises on the downside.
        However, the risks to our interest rate projections are not one-sided. Factors that could cause upside risks to our forecasts include: limited progress on fiscal consolidation; a weak monsoon in 2015; the emergence of geopolitical risks and higher commodity prices in 2015.
        INR -- steady as she goes
        The prevailing conditions of a strong (albeit reducing) carry, rise in confidence for PM Modi and RBI Governor Rajan will drive overall growth higher in 2015 will be a helpful buffer for the INR. The positive investment outlook for Indian bonds has been reinforced with the RBI's easing policy stance.
        The INR was one of the top Asian FX performers in December, staging a small 32bpp appreciation vs the USD. Strong investment preference for INR bonds on the back of rising rate cut expectations helped the INR's resilience against a rising USD. Amongst the fragile five in emerging markets currencies (IDR, INR, BRL, ZAR, TRY), not only does the INR look relatively less fragile, the outlook has actually improved significantly. Foreign investors' risk appetite for INR assets appear to have returned, with month-to-date net purchases seen in equities worth $276m and more in bonds ($1.3bn).
        The attractiveness of India's financial markets assets has increased relative to the other economies in the fragile five group. The bond markets have performed reasonably well and with further rate cuts only partially priced in, we are confident of further declines in yields in coming months. The whole debt curve has shifted markedly lower over the past few months and the benchmark 10Y yield has fallen below the key level of 8%. The yield curve has flattened with buying interest concentrated in the long end and 2-10Y yield spreads have narrowed significantly.
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        Christy Tan is Head of Markets Strategy/Research, Asia for National Australia Bank based in Hong Kong.
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        (END) Dow Jones Newswires

        December 29, 2014 22:37 ET (03:37 GMT)

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