The Indian rupee could be nearing a period of stability after the Reserve Bank of India (RBI) and the government introduced measures to attract foreign capital, according to Goldman Sachs.
In a note, Goldman Sachs analysts led by Kamakshya Trivedi said the latest policy measures are likely to ease pressure on the domestic currency and help curb further depreciation.
“The steps taken by the Reserve Bank of India and the government ‘should limit the depreciation pressure on the rupee’,” the analysts wrote. “We envisage a plateau in the dollar/rupee cross rate.”
The measures announced on Friday include tax exemptions on foreign investments in government securities, wider access for overseas investors to certain debt categories and exemptions for banks raising funds through foreign-currency bonds and deposits. According to market estimates, these initiatives could attract as much as USD 50 billion in foreign inflows.
Goldman Sachs’s assessment comes after the rupee touched a record low of 96.9650 against the US dollar last month. The decline was driven by a rise in global crude oil prices and sustained foreign outflows from Indian equities. The weakness had fuelled market expectations that the currency could weaken further towards the 100-per-dollar mark.
The investment bank has revised its three-month forecast for the dollar-rupee exchange rate to 96 from 97 earlier. It retained its six-month forecast at 96 while raising its 12-month projection to 97 from 96. On Monday, the rupee fell by as much as 0.4 per cent to 95.36 after recording its strongest gain in more than two months on Friday.
“To be clear, we do not expect substantial spot appreciation either,” Trivedi said. “The rupee depreciation is not out of line with other key energy importing currencies in the region, and we expect that any renewed capital inflows should and will be used to rebuild the reserve buffer and unwind the short forward book.”
Carry Trade Appeal
Goldman Sachs also highlighted the rupee’s improving carry appeal following the outbreak of the Iran conflict. According to the bank, the rupee now offers a higher carry than several Asian high-yielding currencies, including the Indonesian rupiah and the Philippine peso.
The bank further noted that the rupee appears undervalued against the US dollar relative to several emerging-market peers within the higher-carry currency universe. As a result, Goldman Sachs said there is an increasing case for investors to reintroduce the rupee into diversified carry-trade portfolios.
