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Rupee Forecasts Top Peers as Modi Plan Wins Converts

Photographer: Dhiraj Singh/Bloomberg

Strategists are raising their forecasts for India’s rupee faster than for any other Asian currency as Prime Minister Narendra Modi’s economic policies attract international investors.

The median estimate in a Bloomberg survey puts the rupee at 61 per dollar by the end of 2015, up from a prediction of 62.3 on June 30 and compared with 60.8275 at 9:56 a.m in Mumbai. While that still indicates a decline, it shows forecasters no longer expect a reversal of the Indian currency’s world-beating 5 percent gain of the past year.

India’s progress in cutting its trade deficit by curbing gold imports and scaling back debt sales is making the nation more resilient to the prospect of higher U.S. interest rates than its regional peers. International investors have pumped a record $7.8 billion into the country’s bonds this quarter.

“India is in a much better position to smooth currency volatility,” Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore, said by e-mail on Sept. 4. “We look for the Modi government to progress with economic reforms, which will help maintain foreign-investor interest in Indian assets.”

Rupee’s Surge

The rupee has risen from an all-time low of 68.845 per dollar in August 2013, and has gained 1.6 percent this year, touching a six-week high of 60.1975 on Sept. 8. ANZ has raised its end-of-2015 forecast to 61 from 65.5, putting it in line with the median of 23 estimates in Bloomberg’s survey.

Strategists are less optimistic about other Asian currencies on bets the Federal Reserve will raise the main U.S. interest rate next year from a range of zero to 0.25 percent. The 2.1 percent jump in rupee forecasts this quarter compares with a 1.3 percent increase for Indonesia’s rupiah and a 0.3 percent boost to estimates for the Philippine peso and Malaysian ringgit.

Voted into power in a landslide election victory in May, Modi benefits from India’s first single-party majority in three decades. That gives the pro-business politician a freer hand to reform the finances of Asia’s third-largest economy than his predecessor, Manmohan Singh, who headed a coalition of 12 parties and passed the fewest bills of any government to complete a five-year term.

Trade Deficit

The rupee tumbled 30 percent in the three years from 2011 to 2013 as the current-account deficit widened under Singh, reaching $31.9 billion in the final quarter of 2012. The shortfall in the broadest measure of India’s trade shrank to $1.2 billion in the first quarter, before expanding to $7.8 billion in the three months ending June 30.

The rupee has also benefited from the policies of Reserve Bank of India Governor Raghuram Rajan, who was appointed a year ago and raised the repurchase rate three times in the past year, to 8 percent. The RBI has used short-term rupee gains to bolster its currency reserves, making Indian assets more attractive.

Morgan Stanley cited those reserves -- which rose to $321 billion in July, approaching a record -- when lifting its end-2015 rupee forecast to 61 per dollar from 67 at the end of June.

“The rupee can probably remain relatively strong,” now that “the RBI now has massively increased their foreign-exchange reserves,” Geoffrey Kendrick, the head of Asian currency and interest-rate strategy at Morgan Stanley in Hong Kong, said in a Sept. 4 phone interview. “The local backdrop is much stronger now. The story in 2013 was of high U.S. rates with a weak local backdrop.”

100 Days

Modi, who completed his first 100 days in office last week, has suffered setbacks that may weigh on the rupee. A push to raise the limit on foreign investment in the insurance industry to 49 percent was thwarted by the opposition in August, raising doubts about the new prime minister’s ability to implement politically sensitive decisions.

Edward Teather, a senior economist at UBS AG in Singapore, predicts the rupee will weaken more than 6 percent to 65 per dollar by the end of next year as faster inflation gives the RBI less scope to cut rates and stoke growth. Price pressures leave India’s currency “still vulnerable,” he said by phone Sept. 8.

Consumer-price inflation reached 7.8 percent in August, from 7.96 percent the prior month, according to the median estimate of economists surveyed before a Sept. 12 report. Economicgrowth will expand by as much as 5.9 percent in the fiscal year ending March 2015, from 4.7 percent in the previous period, the government predicted last month.

As well as a strengthening economy, the rupee has the advantage of the highest government debt yields in Asia, which encourage investment. India’s 10-year bond pays 8.5 percent, compared with yields of 4.3 percent for China, 0.5 percent for Japan and 2.5 percent for U.S. Treasuries.

“The local bond market, offering yields above 8 percent” is “definitely appealing” and has contributed to “the stabilization of the rupee,” Philippe Jauer, the Singapore-based chief investment officer for global fixed income and currencies at Amundi, which oversees $1.1 trillion, said by e-mail Sept. 5. “We’re still very confident that India should do well in the next 12 months.”