Rupee steadies as lower oil prices, inflows boost carry trade appeal

Cooling crude prices and over $40 billion in recent inflows have eased depreciation concerns, improving the Indian currency's attractiveness for carry trades

The Indian rupee was steady on Thursday, tracking subdued moves in regional peers as Brent crude oil ​prices held below $80 a barrel and sustained momentum in ​inflows eased persistent depreciation worries, lifting the currency's carry appeal.

Hopes of ‌a diplomatic resolution to the US-Iran war have cooled oil prices sharply while data shows that measures the central bank introduced in June to bolster India's balance of payments drew over $40 billion in inflows by the end of July.

Both factors are supportive of the Indian currency and have prompted analysts to flag the currency's appeal for carry trades. The rupee had hit a record low of 96.96 per dollar in May but has since recovered, last trading at 95.1550, little changed on the ‌day.

 

Carry trades involve borrowing low-yielding currencies to invest in other currencies and assets offering higher yields.

The rupee's carry-to-volatility ratio, a key determinant of the appeal of such trades, has been rising supported by the RBI's measures to mitigate FX depreciation pressures, analysts at Goldman Sachs said in a note.

BofA Global Research meanwhile says that the rupee offers the best "carry adjusted value," among ​emerging market currencies since it ranks relatively cheap on valuation metrics while offering a high ‌yield.

Persistent depreciation pressures earlier in the year had driven the rupee's real effective exchange rate, a measure that adjusts for inflation and trade ​flows, ‌to multi-decadal lows, per central bank data.

"It doesn't sound like RBI is looking to ‌actively sell dollars to generate INR appreciation, and if anything it may use the dollars to help reduce its net short forward book," analysts ‌at ​MUFG said in ​a note.

"This nonetheless could still overall be a decent outlook for carry for INR."

Asian currencies were mostly rangebound on Thursday while the ‌dollar index was ​just shy of the 100 mark.