19/05/2014 07:56 AST
Aberdeen Asset Management Plc, Mirae Asset Management Co. and Nomura Holdings Inc. predict the rupee will extend a world-beating rally as India’s clearest election verdict in three decades boosts confidence.
Narendra Modi’s Bharatiya Janata Party got 282 of 543 parliamentary seats in the world’s biggest-ever vote, compared with 272 needed to form a government, as voters punished the incumbent Congress party for graft scandals and the worst economic slowdown in a decade. The rupee surged 2.1 percent last week to 58.78 per dollar, the best performance among 78 global currencies tracked by Bloomberg.
The BJP has garnered the first single-party majority since 1984 and that’s boosting bets the new administration will pursue policies to improve the economy without being constrained by coalition politics, according to Deutsche Bank AG. Nomura, the second-most accurate rupee forecaster in the last four quarters, and Aberdeen Asset see the currency rising toward 57 per dollar by year-end, while Mirae Asset predicts a rally to 55.
“The election result was clearly better than we expected,” Craig Chan, Nomura’s Singapore-based head of currency strategy for Asia ex-Japan, said in a May 16 e-mail interview. “The outlook for reforms, potential foreign inflows and growth prospects will be even more positive now.”
More Bullish
Japan’s largest brokerage is projecting bigger rupee gains now than it did in April, when it had estimated the currency would end the year at 59.5. The exchange rate has rebounded 17 percent from a record low of 68.845 reached last year, when India’s slowing growth, relatively high inflation and current-account deficit fueled capital outflows.
The rupee’s recovery from last year’s slump was powered by Prime Minister Manmohan Singh government’s efforts to narrow the current-account gap and the central bank’s measures to rein in price pressures. The shortfall probably shrank to $35 billion in the year through March from an unprecedented $88 billion in the preceding period, Finance Minister Palaniappan Chidambaram said last quarter. Wholesale inflation slowed to 5.2 percent in April from 7.5 percent in November after the Reserve Bank of India raised interest rates three times since September.
International investors, who pared holdings of rupee debt by a record $8 billion in 2013, have already plowed back $5.3 billion so far this year, according to exchange data. Aberdeen Asset and Mirae Asset see inflows into bonds increasing after the BJP-led National Democratic Alliance’s victory.
‘Strong Position’
“With such a strong showing, the BJP and the NDA alliance are obviously in a strong position to make crucial progress on the various reform areas,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen, which oversaw $541 billion as of March, said in an e-mail interview on May 16.
A decisive election victory for the BJP would be a “catalyst” for a long-term advance in the rupee toward 40 to 45 per dollar, Adam Gilmour, Citigroup Inc.’s head of Asia-Pacific currency and derivatives sales, said in a March 12 interview in Singapore.
A potential pickup in fund inflows after the election will probably drive the 10-year (GIND10YR) government bond yield to 8 percent, a level last seen in July, as long as inflation doesn’t quicken, according to Mirae Asset. The rate on the benchmark 8.83 percent notes due November 2023 has risen one basis point, or 0.01 percentage point, this month to 8.83 percent in Mumbai.
Inflows Seen
“India will see more positives emerging and foreign inflows rising after this election result so long as the government and the central bank work in tandem,” Kim Jin Ha, a global fixed-income fund manager in Seoul at Mirae, which oversees about $59 billion, said by e-mail on May 16.
While the election results have buoyed optimism about India’s policies, the central
Bloomberg
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