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Top rupee forecasters see rebound on bond inflows

Bloomberg  |  Bangkok/ Mumbai 

International investment in India’s bonds would rise this year as policy makers rein in inflation, boosting the rupee after 2011’s 16 per cent slump, according to the most-accurate forecasters for the currency.

The rupee will strengthen four per cent to 51 per dollar by the end of 2012, according to ING Vysya Bank Ltd, the local unit of the biggest Dutch financial services company and the most- accurate forecaster as measured by Bloomberg Rankings in the six quarters through December. The currency will gain 5.1 per cent to 50.50, according to Oversea-Chinese Banking Corp, which ranked second.

International investors boosted their ownership of rupee- denominated notes by $1.6 billion this month to $27.7 billion after government data showed food prices fell for the first time on record in the week ended December 24. The 8.20 percent yield on the nation’s 10-year securities is more than four times that on US Treasuries and almost five percentage points more than similar-maturity Chinese debt.

“There will be a revival in sentiment and that should bring in money,” Upasna Bhardwaj, a Mumbai-based economist at ING Vysya Bank, said in an interview on January 6. “We continue to see investments on the debt side as inflation slows, and Indians living overseas should also contribute to inflows to benefit from higher interest rates.” Global funds bolstered holdings of India’s bonds by $3.9 billion last month, the biggest increase on record, as the central bank said in a statement on December 16 that policy makers “are likely to reverse the monetary policy cycle” to support growth after seven interest-rate increases in 2011. The inflows have contributed to a 1.6 per cent advance in the rupee this month, the best performance among Asia’s 10 most-traded currencies, according to data compiled by Bloomberg.

Estimated returns
The rupee, which gained 0.4 per cent to 52.33 per dollar today in Mumbai, will end 2012 at 50, according to the median of 21 estimates compiled by Bloomberg. The currency will return 15 per cent, including interest, the strategists predict. That compares with estimated total returns of 18 per cent on Brazil’s real, 10 per cent on Russia’s ruble and 4.1 per cent for China’s yuan. India’s benchmark government bonds have rallied this year, after slumping in 2011, on speculation inflation is slowing in Asia’s third-biggest economy. Wholesale prices rose 7.40 percent in December from a year earlier, the least in two years, according to the median forecast of 15 economists in a Bloomberg survey before government data due on January 16.

Bonds Rally
Prices of food articles fell 3.36 per cent from a year earlier in the week through December 24, the first drop since Bloomberg started compiling the data in April 2006. Food prices have a weighting of about 14 per cent in the nation’s inflation basket.

The yield on India’s benchmark 8.79 percent notes due in November 2021 rose two basis points today to 8.22 percent today, according to the central bank’s trading system. The yield on 10- year notes, which rose 65 basis points last year, has slid 38 basis points in 2012. India’s bonds have outperformed their regional peers this month following the slump in yields. Rupee-denominated notes have returned 1.27 per cent in January, the best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.

The difference in yields between India’s securities due in a decade and similar-maturity US Treasuries was 621 basis points today, compared with a record-high 697 basis points reached on November 9.

Current Account

There are signs inflation will slow to 6 percent or 7 per cent “in the coming months,” minister Pranab Mukherjee said in a speech in Mumbai on January 7. Price increases will moderate to around 7 per cent by March, in line with the Reserve Bank of India’s estimate, according to ING Vysya Bank’s Bhardwaj.

“Inflation will be contained into 2012,” supporting fund flows into the nation’s bonds, Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp, said in an interview on January 5. “So once we have an improvement in risk appetite, the rupee will respond fairly well as inflows improve.”

The margin of error on Oversea-Chinese Banking Corp.’s rupee forecast was 2.26 per cent, while ING’s was 2.17 per cent, according to data compiled by Bloomberg.

India’s current-account deficit and rising oil prices will weigh on the rupee, according to Bank of Tokyo-Mitsubishi UFJ Ltd, a unit of Japan’s biggest lender by market value.

‘Unfavorable’ Factors
The shortfall in the broadest measure of trade was $16.89 billion in the three months through September, compared with $16.90 billion touched in the year-earlier period. Crude-oil prices have climbed 2.8 percent in 2012 after rising 8.2 percent in 2011, data compiled by Bloomberg show. Both factors helped contribute to the rupee’s 2011 slide, the worst performance among Asia’s 10 most-traded currencies.

“In India’s case, they face both unfavorable cyclical and structural factors,” Leong Sook Mei, the Singapore-based regional head of global currency research at Bank of Tokyo- Mitsubishi UFJ, said in an interview yesterday. “That’s why we have been bearish on the rupee. Oil prices have stayed relatively resilient, pressuring the current account even further.”

Bank of Tokyo-Mitsubishi predicts the rupee will weaken to 55 per dollar by the end of June before recovering to 51 by the end of the year.

The cost of protecting the debt of State Bank of India, the nation’s biggest bank that some investors consider a proxy for the sovereign, is rising as Europe’s credit crisis dims the allure of emerging-market assets.

Default Swaps
Five-year credit-default swaps on the lender cost 405 basis points on January 6, the most since March 2009, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps, which were unchanged yesterday, pay the buyer face value for the underlying securities should a company fail to adhere to its debt agreements.

India’s benchmark Sensitive Index (SENSEX) of shares has gained this year on speculation policy makers will reduce borrowing costs. The index, which slid 25 per cent in 2011, has rallied 2.9 per cent in 2012. The Reserve Bank will cut its 8.5 per cent benchmark repurchase rate by 150 basis points in 2012, according to Goldman Sachs Group Inc.

Barclays Capital, the third-most accurate rupee forecaster tracked by Bloomberg, predicts the currency will climb 11 percent to 48 by year-end. The rupee will advance 3.2 per cent to 51.4 this year, according to Westpac Banking Corp, ranked at the same level as Barclays among Bloomberg’s most-accurate rupee forecasters.

“We think inflation will come down this year, which should give the RBI some room to cut rates in the second half of the year and that should support investment,” Nick Verdi, a currency analyst at Barclays in Singapore, said in an interview on January 6.

“These factors should serve to stem some of the rupee’s weakness we have seen recently.”

First Published: Wed, January 11 2012. 00:59 IST