indian+rupee+ +clsa
TRANSCRIPT
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 1/6
Rajeev Malik +65 64167890 [email protected] 29 March 2012
ECONOMICS RESEARCH
RupeewoesINR remains one of the riskiest currencies. India’s large and widening
current account (CA) deficit and its dependence on volatile capital inflows
make it vulnerable to becoming a casualty of swings in global risk appetite
and crude oil prices. INR’s recovery in January was due partly to RBI’s
aggressive currency intervention, although global risk-on, RBI’s anti-
speculative measures and deregulation of NRI deposit rates also
helped. However, INR has been weakening against USD since early
February, despite a surge in portfolio inflows into India (1Q12: around
USD13.5bn). Global risk-on will likely boost volatile capital inflows unless
domestic factors, such politics and policy coordination, are turn-offs. But
capital inflows may not be adequate to eliminate concerns about smooth
financing of the CA deficit. On our forecast, the CA deficit of 3.9% of GDP
in FY13 is beyond the RBI’s comfort level. This, along with our
expectations of a stronger dollar, sets the stage for INR to weaken. We
maintain our end-2012 forecast of INR55:USD.
INR has had an exceptionally volatile ride (Figure 1). It slumped to nearly
INR54:USD in mid-December before recovering to INR49:USD by mid-
February due to a combination of an unexpectedly strong jump in portfolio
inflows triggered by global risk-on and RBI’s desperate measures, including
aggressive currency intervention in January. However, it weakened
subsequently and has broken above the 51-mark despite USD weakness. The
pace of capital inflows has slowed recently even as the CA deficit remains
large. In the absence of meaningful RBI currency defence, INR had to weaken.
Figure 1: ADXY Index and INR/USD
Note: Rise in ADXY indicates appreciation. Source: Bloomberg, CLSA Asia-Pacific Markets
35
37
39
41
43
45
47
49
51
53
55100
105
110
115
120
125
Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
(Index)
ADXY Index
INR/USD (RHS)
(INR/USD, reverse axis)
INR REMAINS VULNERABLE
EXCEPTIONALLY VOLATILE
RIDE FOR INR
YTD INR HAS DEPRECIATED
MORE THAN ADXY
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 2/6
India unplugged29 March 2012
INR’s performance in recent months has been similar to that of some of the
risky EM currencies (Figure 2). This suggests an understandable strong global
risk on/off dimension that is complemented by domestic factors. For example,
the turning point for INR in December is not substantially different from that of
other EM currencies, despite the RBI’s anti-speculative actions and
deregulation of NRI deposit rates.
Figure 2: Emerging markets exchange rate
Source: Bloomberg, CLSA Asia-Pacific Markets
Looking ahead, three key factors will affect the outlook for INR. First,
sustainability of global risk-on and its impact on international crude oil prices
and capital inflows into India. Higher crude oil prices widen the CA deficit but
higher capital inflows due to global risk-on temporarily ease the financing
pressure. Every USD10/bbl increase in crude oil adds around USD10bn (0.5%
of GDP) to the CA deficit. As highlighted in Figure 3, we expect the CA deficit
to widen to USD73.1bn or 3.9% of GDP in FY13 from an estimated
USD66.6bn (3.7% of GDP) in FY12.
Figure 3: Current account deficit
Note: FY12 and FY13 are CLSA forecasts; Source: CEIC, CLSA Asia-Pacific Markets
80
85
90
95
100
105
110
115
120
125
130
Jan 10 Jul 10 Jan 11 Jul 11 Jan 12
Russia - RUB/USD
India - INR/USD
Brazil - BRL/USD
Turkey - TRY/USD
(Index, 1 Jan 2010 100)
(3)
(2)
(1)
0
1
2
3
4
5
(20)
(10)
0
10
20
30
40
50
60
70
80
FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13
(% of GDP)(USD bn)
Current account deficit
Current account deficit % of GDP (RHS)
INR AT THE MERCY OF CRUDE
OIL PRICE AND CAPITAL
INFLOWS
INR BEHAVING SIMILAR TO
OTHER RISKY EM
CURRENCIES
CA DEFICIT TO WIDEN TO A
RECORD HIGH
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 3/6
India unplugged29 March 2012
But no economy with a large CA deficit should rely mainly on portfolio
inflows to finance the deficit as these inflows can be uncertain. Also, it is
unlikely that capital inflows will comfortably and smoothly finance the wider
CA deficit in FY13.
Second, outlook for USD. We expect USD to strengthen in 2H12, which in turn
should be negative for INR. Note that INR has weakened in recent weeks
despite USD weakness (Figure 4). Such an outcome does not boost confidence.
Figure 4: INR/USD and DXY index
Source: Bloomberg, CLSA Asia-Pacific Markets
Third, RBI’s intervention in the currency market to support INR, if capital
inflows are inadequate to finance the CA deficit. Currency intervention to
prevent depreciation of the exchange rate is a losing proposition that will leave
the central bank with a combination of a decline in its foreign reserves and a
still-weak currency, and could also be an invitation for a speculative attack.
Figure 5: RBI’s currency intervention and INR/USD
Note: Positive number means net purchase of USD; Source: Bloomberg, CEIC, CLSA Asia-Pacific Markets
35
3
39
41
43
45
4
49
51
53
5565
70
75
80
85
90
95
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
(Index)DXY Index
INR/USD (RHS)
(INR/USD, reverse axis)
38
40
42
44
46
48
50
52
54(20)
(15)
(10)
(5)
0
5
10
15
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
(USD bn)
RBI's net sale/purchase of USDINR/USD (RHS)
(INR/USD, reverse axis)
INR HAS DEPRECIATED
RECENTLY DESPITE USD
WEAKNESS
STRONGER USD WILL BE
NEGATIVE FOR INR
RBI UNLIKELY TO INTERVENE
AGGRESSIVELY
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 4/6
India unplugged29 March 2012
RBI has been aggressive in supporting INR with heavy USD selling at
USD7.3bn in January, only slightly lower than the currency intervention of
USD7.8bn in December (Figure 5). However, looking ahead, RBI is unlikely to
prevent INR from adjusting because of inadequate capital inflows, although it
is likely to manage INR better than it did late last year.
The combination of above three factors suggests to us that INR is poised to
weaken. We reiterate our end-2012 forecast of INR55:USD but the ride will be
volatile due to shifting global risk appetite.
Figure 6: Net FII – Debt and Equity
Note: March 2012 data up to 28 March; Source: CEIC, CLSA Asia-Pacific Markets
YTD total FII investment (net) is around USD13.5bn, with the equity portion at
USD9.1bn and the debt portion at USD4.4bn (Figure 6). This is the second-
highest quarterly level of total FII inflow after USD15.5bn in 3Q10. However,
monthly inflows weakened significantly in March, and the outlook remains
uncertain. This in turn will affect INR and the pace of accumulation of foreign
reserves (Figure 7).
Figure 7: Foreign reserves and INR/USD
Source: Bloomberg, CEIC, RBI, CLSA Asia-Pacific Markets
(4)
(2)
0
2
4
6
8
Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
(USD bn)
Equity Debt
35
37
39
41
43
45
47
49
51
53
550
50
100
150
200
250
300
350
Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
Foreign reserves
INR/USD (RHS)
(USDbn) (INR/USD, reverse axis)
FOREIGN RESERVES
AFFECTED BY RBI’S
CURRENCY INTERVENTION
FII INFLOWS MODERATED IN
MARCH
WE MAINTAIN OUR FORECAST
OF INR55:USD
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 5/6
India unplugged29 March 2012
Figure 8: INR/USD and BSE Sensex
Source: Bloomberg, CLSA Asia-Pacific Markets
Figure 9: INR/USD and Brent
Source: Bloomberg, CLSA Asia-Pacific Markets
Figure 10: NRI deposits
Source: CEIC, CLSA Asia-Pacific Markets
35
37
39
41
43
45
47
49
51
53
551,000
6,000
11,000
16,000
21,000
26,000
Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
(Index)
Sensex Index
INR/USD (RHS)
(INR/USD, reverse axis)
35
37
39
41
43
45
47
49
51
53
550
20
40
60
80
100
120
140
160
Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
(USD/bbl)
Brent
INR/USD (RHS)
(INR/USD, reverse axis)
20
25
30
35
40
45
50
55
60
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
(USD bn)(USD bn) NRI deposits: Net accretion
NRI deposits: Outstanding (RHS)
EQUITY PERFORMANCE WILL
IMPACT INR
GAIN IN JANUARY NRI
DEPOSITS DISAPPOINTING
HIGHER CRUDE OIL PRICE +
WEAKER INR TROUBLE
8/2/2019 Indian+Rupee+ +CLSA
http://slidepdf.com/reader/full/indianrupee-clsa 6/6
India unplugged29 March 2012
Figure 11: Merchandise import cover of foreign reserves
Note: FY12 and FY13 are CLSA forecasts; Source: CEIC, CLSA Asia-Pacific Markets
Figure 12: Real effective exchange rate (REER) and INR/USD
Source: BIS, Bloomberg, CLSA Asia-Pacific Markets
©2012 CLSA Asia-Pacific Markets (“CLSA”). IMPORTANT: The content of this report is subject to and should be read in conjunction with thedisclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on requestfrom CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. 01/01/2012
0
2
4
6
8
10
12
14
16
18
FY81 FY83 FY85 FY87 FY89 FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13
(No. of months)
30
35
40
45
50
55
75
80
85
90
95
100
105
110
Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
(INR/USD)(2010=100, Index)REER
INR/USD (RHS)
IMPORT COVER IS POISED TO
DECLINE FURTHER
CAPITAL INFLOWS RATHER
THAN REER APPEARS TO BE
THE KEY DRIVER OF INR