Rupee set for best Q1 since 1975 as funds pour in $12 billion

Reserve Bank of India's intervention in currency markets may intensify if inflows rise

Foreign investors gorging on Indian stocks and bonds have put the rupee on course for its best first-quarter performance since 1975. The currency, Asia’s best performer this month, has rallied 4.7 per cent since December 31, as a thumping win for Prime Minister Narendra Modi’s party in state elections boosted bets for continuation of the government’s reform agenda, luring overseas funds. The Reserve Bank of India’s (RBI’s) intervention in currency markets may intensify if inflows rise, according to Standard Chartered Plc.
 
“Change in sentiment toward India after the state elections and high real rates have attracted large portfolio flows into equity and debt,” said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered. “Market action indicates that RBI has been intervening and we think they could continue to do so if the flows continue.”
 
Foreign holdings of rupee-denominated government and corporate bonds climbed by Rs 35,940 crore ($5.5 billion) this quarter, with Rs 27,200 crore coming in March alone, the most for any month in Bloomberg-compiled National Securities Depository’s data going back to mid-2011. Overseas funds have poured $6.1 billion into Indian stocks since the year-end, of which $4.5 billion has come this month. The Federal Reserve's dovish tone on future rate hikes, which contributed to a weaker dollar, also burnished the allure of assets in emerging markets. The rupee climbed 0.1 per cent to 64.8850 per dollar in Mumbai on Friday, taking its gain this month to 2.8 per cent. The three-month advance is the biggest for any quarter since the period ended September 2012.               
 
The S&P BSE Sensex of shares has rallied more than 11 percent this year, set for the best quarter since the period ended June 2014. “Unlike in the past, RBI’s intervention in the currency market has not been aggressive enough this time around,” HDFC Bank economists led by Abheek Barua wrote in a report received by email this week. “The fair value of rupee has changed from around 67 to 65 currently.”

 
The currency “could trade higher in the 65.50-66.00 range by May or so,” Gopikrishnan of Standard Chartered said. Yields on local sovereign bonds, among the highest in Asia, are another reason for foreign investors to flock to India. The 10-year yield jumped 46 basis points last month, the most since July 2013, after policy makers unexpectedly signaled an end to its monetary easing cycle. It has fallen 13 basis points this month, helped by the inflows.
 
At 6.74 per cent on Friday, India’s 10-year government notes pay 432 basis points more than similar-maturity US Treasuries.