Mumbai: Global lenders from Barclays Plc to Commonwealth Bank of Australia are cutting rupee forecasts more than for any other Asian currency as the weakest monsoon since 2009 leads the Reserve Bank of India to reduce growth estimates.
Currency strategists lowered their median year-end predictions by 1.1 per cent since the end of June, the most among the 11 currencies in the region tracked by Bloomberg. Forecasts for the Thai baht and Vietnam’s dong were cut by 0.5 per cent.
The disappointing monsoon that’s threatening crops across half of India prompted Governor Duvvuri Subbarao on July 31 to cut the RBI’s annual growth forecast to match the slowest pace seen in almost a decade. He also refrained from lowering the highest interest rates among the largest emerging markets, prompting investors to reduce holdings of local benchmark 10-year bonds with yields more than double those on Chinese debt.
“The drought could lead to some near-term weakness” in the economy, Nick Verdi, a strategist at Barclays’s investment banking unit in Singapore, said in an August 6 interview. “Given the added inflation risks emanating from the monsoon, external investors will be thinking about the degree of monetary stimulus the central bank can afford. This could affect inflows.”
Barclays predicts the rupee will end the year at 53.17 per dollar, compared with its earlier estimate of 48.83. Commonwealth Bank lowered its forecast to 54 from 48.50 as of the end of last quarter, while Westpac Banking Corp. cut its estimate to 53.98 from 53.50. HSBC Holdings Plc maintained its prediction of 57, saying risks point to a weaker currency.
The rupee will be at 54.60 per dollar at the end of 2012, according to the median of 27 estimates in a Bloomberg survey. That’s weaker than a prediction of 54 as of the end of June.
The June-September monsoon season, which accounts for more than 70 percent of the country’s total rainfall, may measure 85 per cent of a 50-year average, the India Meteorological Department said on August 3.
Overseas investors cut holdings of rupee-denominated debt by $29 million through August 3 since the central bank said July 31 that inflation, which exceeded 7 per cent for a fifth straight month in June, may be aggravated by “deficient and uneven” rainfall. The monetary authority raised its inflation forecast for the year through March 2013 to 7 per cent from 6.5 per cent and left the benchmark repurchase rate unchanged at 8 per cent for the second straight meeting even after China, South Korea and the Philippines cut borrowing costs this quarter to spur growth.
Subbarao lowered the RBI’s growth forecast to 6.5 per cent from 7.3 per cent. The revised estimate matched the previous year’s pace of expansion, which was the slowest in nine years.
The Forward Markets Commission, India’s commodity regulator, has since imposed special margins on wheat and sugar futures contracts after prices surged 22 per cent and 28 per cent since the end of May on speculation the dry weather will curb planting and reduce supplies.
“We remain bearish mainly because lacklustre rainfall means growth should continue to underwhelm and inflation risks remain elevated,” Andy Ji, a Singapore-based strategist at Commonwealth Bank, wrote in an e-mailed response on August 6. “The bearish stance should be balanced against the overall improvement in global risk appetite.”
Speculation that the Federal Reserve and the European Central Bank will purchase bonds to support global growth has helped the rupee strengthen 4.2 per cent from a record low of 57.3275 on June 22, according to HSBC and Westpac. The currency advanced 0.1 per cent to 55.0150 today, data compiled by Bloomberg show.
The cash additions may flow into emerging markets such as India, where 10-year sovereign bonds yield 652 basis points, or 6.52 percentage points, more than similar-maturity US Treasuries. The premium investors demand on comparable Chinese notes is 173 basis points, according to data compiled by Bloomberg.
The yield on India’s 8.15 per cent bond due June 2022 fell three basis points to 8.12 per cent today, according to the central bank’s trading system. Rupee-denominated debt earned 5.9 per cent this year, compared with 7.2 per cent by Indonesian securities and 5.2 percent on South Korean notes, HSBC indexes show.
“The risk environment is flaky,” Perry Kojodjojo, a strategist at HSBC in Hong Kong said in an interview yesterday. “If expectations of quantitative easing in the US do not materialise, or the situation in Europe worsens, the rupee could face further depreciation pressures.”
The currency may end 2012 weaker than HSBC’s prediction of 57 per dollar if the Fed and ECB fail to announce stimulus measures, according to Kojodjojo. Failure by Indian policy makers to take measures to curb the government’s budget deficit may also hurt the rupee, he said.
Finance Minister Palaniappan Chidambaram, making his first statement after taking charge of the ministry last week, said on August 6 that he will seek fiscal consolidation and work to revive investment. The government will boost imports of goods that are in short supply he said.
“The economy is challenged by a number of factors,” Chidambaram said at a briefing in New Delhi. “With sound policies, good governance and effective implementation we would be able to overcome these challenges. Uppermost in my mind is the duty to regain the confidence of all stakeholders.”
Bond risk has risen after proposals, including allowing the retrospective taxation of overseas deals in which an Indian asset is transferred, and a planned clampdown on tax avoidance, stoked concern that India’s investment climate is deteriorating.
Credit-default swaps on State Bank of India, which some investors consider a proxy for the sovereign, have risen 93 basis points in the past year to 313 in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
“There’s been a lot of rhetoric in India in the past 12 months that hasn’t translated into action,” Jonathan Cavenagh, a strategist at Westpac in Singapore said in an interview yesterday. “Investors will wait until they see more concrete measures. I’m a bit hesitant to believe that will eventuate.”
Cavenagh said Westpac will cut its 53.98 end-December forecast for the rupee if food inflation accelerates. Food prices rose 10.81 percent in June, remaining above 10 percent for the fourth straight month.
“The drought might not only contribute to inflation, but the nation may also have to import food,” he said. “So it’s a double concern.”