FITCH SEES RUPEE REBOUNDING TO 82 PER DOLLAR ON BOND INFLOWS

The potential big foreign inflows into Indian bonds will help the rupee recover from near a record low, but the nation’s central bank is likely to limit the extent of gains, according to Fitch Ratings.

The rupee is expected to appreciate to 82 per dollar by the year-end, from about 83.50 currently, Jeremy Zook, a director at Fitch in Hong Kong, said in an interview last week. The Reserve Bank of India may continue to prevent any sharp swings in the currency by absorbing inflows, he said.

India’s bond market is likely to see additional inflows of as much as $30 billion after the nation’s inclusion in JPMorgan Chase & Co.’s emerging market index starting in June. The flows will test the RBI’s tight grip on the rupee that helped limit volatility in the currency and aided the nation’s export competitiveness.

Even though the currency touched a record low of 83.58 against the dollar in April, it has outperformed emerging Asia peers this year, boosting its appeal for investors.

“India does seem pretty well poised with bond index inclusion and flows that should be coming in the second half of the year,” said Zook, who has worked at the US Treasury Department and the International Monetary Fund in the past. “The RBI has large external reserve buffers and a modest current-account deficit at this point in time.”

Fitch’s estimate for the rupee is stronger than the median estimate of 83 per dollar in a Bloomberg survey. A shrinking trade deficit and limited impact on crude oil prices from the conflict in the Middle East are in favor of the currency.

To shield the nation from hot money flows, the RBI has built one of the largest stockpiles of foreign exchange in the world. A widely anticipated win for Prime Minister Narendra Modi in the ongoing national polls is also bolstering the case for inflows.

“Even if there is an oil price shock, India has the buffers to manage some of those risks,” said Zook. “We expect policy continuity after the elections. In terms of reforms, we will keep an eye out on the post-election budget,” he added.

Here are some more comments from the interview:

• Robust economic growth and external finances are key strengths for India’s sovereign profile
• High debt-to-GDP ratio remains a stumbling block from sovereign rating point of view — India may be looking at a debt-to-GDP ratio of slightly lower than 80%, compared with around 50% for peer economies with the same credit rating
• Fitch is watching for reforms around broadening tax base and increasing revenue after elections