Indonesia's rupiah set to outperform Indian rupee, says Goldman: Here's why

Indonesia’s rupiah is set to outperform the Indian rupee thanks to the diverging impact of oil prices, portfolio flows and monetary policy sensitivities to the Federal Reserve, according to Goldman Sachs Group Inc.

“Although India and Indonesia are typically clubbed together under “high-yielding Asian currencies, there are several key differences in the structure of both economies that may differentiate their market performance and create investment opportunities,” economists including Nupur Gupta and Jonathan Sequeira, wrote in a Jan. 7 note.

Indonesia is a net commodities exporter due to its coal exports, and higher commodity prices will help its fiscal balance and hurt India’s.

Indonesian portfolio flows are dominated by bonds rather than equities, and its notes should outperform given significantly reduced U.S. rate hike expectations, relatively more hawkish Bank Indonesia pricing and better supply/demand dynamics due to the lower fiscal deficit.

BI is more sensitive to the Fed than the Reserve Bank of India, having raised its benchmark rate by 175 basis points in 2018 following the four U.S. rate hikes. The RBI hiked by just 50 basis points.

The rupiah has kicked off the new year outpacing all its Asian peers with a near 2 percent rally against the dollar to its strongest level in 6 months. India’s currency was among the region’s worst performers, down almost half a percent, a sharp turnaround from the fourth quarter when it took top spot.

“The recent outperformance of the INR and India’s bond market was driven by the sharp drop in oil prices in 4Q 2018,” the economists wrote. “With oil prices likely to rise or stabilize near term, we think INR’s recent outperformance over IDR is overdone and the IDR is poised to outperform the INR.”

Furthermore, India faces a less predictable outcome at its general elections this year compared to Indonesia where President Joko Widodo is expected to win a second term, according to Goldman. This will impact the countries capital flows and currency performance, it said.