Rupee may resume its winning ways in 2019 as Santa rally brings good news

Tumbling oil prices have delivered an early Christmas present to India’s currency market, with the rally that’s put the rupee on course for its best quarter since March 2017 seen extending into the new year.

That’s the message from strategists coming off a largely painful 2018, as elevated energy costs and a strong dollar combined to make the rupee Asia’s worst performer. The slump in crude and hopes of a slowdown in the pace of tightening by the Federal Reserve mean the high-yielding currency may resume its winning ways next year, strategists say.

“We expect the rupee to be a top performer, particularly on a total return basis,” said Dushyant Padmanabhan, a strategist at Nomura Holdings Inc. in Singapore. “We expect a reversal of the underperformance from prior months and a recovery amid low oil prices, a less hawkish Fed and an improving portfolio flow outlook.”

Cheaper oil and a central bank that’s boosting the amount of money it’s adding to the economy have driven gains in Indian assets this week. Because Asia’s third-largest economy relies on imports to meet its energy requirements, higher crude prices sent the rupee to multiple lows in October and spurred foreigners to pull about $12 billion from local stocks and bonds in 2018.

The rupee jumped 2.1 per cent over Monday and Tuesday, its biggest two-day gain since September 2013, before ending little changed on Wednesday. The currency is up 3 per cent this quarter, the best performance in Asia after Indonesia’s rupiah.

National Vote

To be sure, the turn in sentiment could still unravel if Prime Minister Narendra Modi, whose party was rocked by defeats in key regional elections recently, fails to win a second term at general elections due by May. Rupee forecasters’ base case is that the Bharatiya Janata Party will return to power with the help of coalition allies.

“The market has priced in return of the incumbent with reduced majority,” said Aditya Pugalia, Dubai-based director of financial markets at Emirates NBD PJSC. “Should that not happen and results throw up a fragile coalition, then it will put the rupee under pressure.”

The rupee will end 2019 at 71.15 per dollar, according to the median estimate in a Bloomberg survey of economists. The currency ended at 70.40 per dollar on Wednesday.

Here are some more comments from strategists:

Nomura (Dushyant Padmanabhan)

Risks include a sharp rise in oil, potential for slowing of capital inflows ahead of the general elections and if local challenges ranging from the NBFC issue or discord between the RBI and government re-emerge

RBI will probably absorb some of the heavy capital inflows, although the impetus for them to aggressively accumulate reserves is not as high as others in the region as their draw-down in FX reserves last year was relatively small

USD/INR forecast for four quarters -- 70, 68.5, 68, 67

ANZ (Khoon Goh, head of Asia research)

Most of the external headwinds for INR weakness not expected to be present next year

Retreat in oil prices and a pause in Fed hiking cycle seen outweighing local concerns, resulting in a resumption of foreign portfolio inflows

INR will regain lost momentum, but much of it will come post elections

USD/INR forecasts for four quarters -- 71.2, 70.50, 70, 69.80

Emirates NBD (Aditya Pugalia)

Without taking into account election results, INR should gradually appreciate over 2019

Expect 4Q 2018 trend of easing oil prices and USD to continue. Local factors will continue to remain favorable with benign inflation and improving growth

USD/INR forecasts for four quarters -- 71, 69, 69, 68

Rabobank (Hugo Erken, senior economist)

Number of developments bode well for INR in the short term; expect it to bottom out to 69.1 in May

Inflation has been surprising on the downside and Fed has softened its tone

Expect BJP to win sufficient seats for a majority with partners; it may have to resort to coalition-based politics, which will likely stall business-friendly reform agenda