Photo: HT
Photo: HT

Mumbai: Investing in Asia’s worst-performing currency is all about the interest rate.

While the rupee fell 0.6% versus the dollar this year, flows from stock and bond investors both turned positive in March amid slower inflation, an improved current account and budgetary discipline. Including interest, investing in rupees will earn 2.9% from now until 31 December, according to strategists’ forecasts compiled by Bloomberg, the most in emerging Asia.

“The rupee remains a very attractive play over a one-year horizon,” said Viraj Patel, a London-based strategist at ING Groep NV, among the most-accurate rupee forecasters in Bloomberg’s rankings. “Lower inflation, a subdued current- account deficit, high growth and carry will all pay dividends in the future as the global economy turns the corner.”

Interest rates below zero in Europe and Japan are attracting investors to a nation that has the second-highest yield among key Asian markets and the fastest growth among major economies. The rupee’s allure has been burnished by Reserve Bank of India (RBI) governor Raghuram Rajan’s success in replenishing foreign-exchange reserves and taming consumer prices and the trade deficit.

Prime Minister Narendra Modi’s 29 February budget sparked a rally in India’s rupee, bonds and stocks as the government’s resolve to narrow the fiscal deficit to a nine-year low boosted investor sentiment. Data showing inflation eased to a four-month low in February also increased odds of interest-rate cuts by Rajan, while demand for emerging-market assets has picked up amid global central bank stimulus.

Ten-year bonds in India pay 7.51% even after the yield has slumped 27 basis points from 26 February, the last trading day before the budget. Similar-maturity notes offer 7.79% in Indonesia and 2.83% in China. Foreign holdings of rupee-denominated government and corporate debt have risen Rs.2,110 crore this month after February’s withdrawals of Rs.8,760 crore that were the biggest since April 2014.

“We are in a very-low interest rate world,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “India’s superior growth versus rest of the region alongside the central bank’s commitment to inflation stability means that on a risk-adjusted basis, the carry proposition of the rupee will look quite alluring.”

The rupee has surged 2.8% in March to head for its biggest monthly advance in two years. The jump follows a 3.3% decline in the first two months of 2016, during which it fell to the brink of its record low of 68.845 a dollar seen in August 2013. The rebound provided the RBI an opportunity to accumulate foreign-exchange reserves, which reached a record $355.95 billion in the week through 18 March.

Mizuho forecasts the rupee to end 2016 at 64.50 a dollar, a level that is 3.2% stronger than the currency’s close of 66.54 in Mumbai on Tuesday. ING has an year-end projection of 66. These predictions are at odds with Barclays Plc and Morgan Stanley, which say a strengthening dollar and weak global risk appetite will bring more pain for the Indian currency, with Morgan Stanley estimating a drop to 73 by 31 December.

India has eclipsed China as the world’s fastest-growing major economy with gross domestic product (GDP) projected to expand 7.6% in the fiscal year through March. The slump in Brent crude prices has benefited the net oil importer, with the trade deficit for Asia’s third-largest economy shrinking in February to the smallest since September 2013. The current-account deficit in the three months through December narrowed to $7.1 billion, from $8.7 billion in the previous quarter.

The Federal Reserve’s decision this month to scale back expectations for the path of interest-rate increases came as a shot in the arm for developing-nation assets. Global funds have pumped in a net $2.7 billion into Indian stocks in March after pulling out $1.2 billion last month, data compiled by Bloomberg show.

Investing in rupees returned 3%, including interest, in the past four quarters, data compiled by Bloomberg show, the highest in Asia. The rupee weakened 4.7% in the period.

“With the Fed now taking the foot off the pedal in terms of rate hikes, high-yield emerging-market currencies will be back in vogue and the rupee will be among those in demand,” said Patel of ING. “Oil prices remain the key. If we start to get a sharp rebound, then both the current account and monetary policy could come under scrutiny.”