Rupee to slide towards 88 against the dollar: Bank of America’s Rahul Namjoshi
Any possibility of tariffs, however low, on Indian exports will have a further negative impact on INR, said Rahul Namjoshi, Head of India FICC (Fixed Income, Currencies and Commodities) Sales, Bank of America. A depreciation of Chinese yuan will also have a substantial impact on the INR given our large trade imbalance with China, he said. Excerpts:
The Indian rupee is down around 4 per cent in the past four months against the dollar. Do you expect the slide to continue?
We have seen the INR under pressure in the last four months on the back of a broad dollar rally in general and FPI outflows in particular from the Indian market. Post the recent liquidity infusion measures announced by the RBI, the probability of a rate cut has increased adding to some pressure on the INR in the run up to this week’s MPC meeting. The move this week has been in response to tariff announcements by the Trump administration over the weekend. In the near term, both global and domestic factors will determine the INR trajectory.
What are the global factors that will come into play?
We expect INR to move in line with the dollar index and trend towards 88.00 in the coming months. The new Trump administration’s policies are rapidly evolving and any possibility of tariffs, however low, on Indian exports will have a further negative impact on INR. A depreciation of Chinese yuan will also have a substantial impact on the INR given our large trade imbalance with China. The markets expect universal tariffs to ultimately feed into higher US inflation, higher US rates and a stronger USD.
Does this warrant more intervention in the foreign exchange market or should the central bank adopt a more hands-off approach?
RBI has been judiciously managing FX reserves while ensuring that INR volatility stays within a range. We have already seen a gradual loosening of daily ranges in USD-INR recently and expect the RBI to continue to ensure that INR moves in line with the dollar index and stays competitive relative to its trade partners while curbing excess volatility.
How are companies bracing for rupee volatility/depreciation? How are they likely to get impacted?
Till September end, INR was held in a very narrow range and the overall industry hedge ratio was below historical averages. A relatively sharp move in the December-end quarter led to FX losses on account of unhedged foreign currency exposure. This is getting reflected in financials of some of the import heavy industries such as airline and auto companies. At the same time, IT companies have gained on account of the INR depreciation. Given the headwinds, we expect hedge ratios to go up this quarter. On the product side, clients will be using a mix of FX options and forwards to hedge currency risk. Hedge tenors are also expected to be extended on the back of higher forward premia.
We have seen FPIs pull out money from the debt market in January. What are the factors that have contributed to this?
Several factors are responsible. US Treasuries (USTs) are at an attractive absolute level and touched 4.79 per cent in January. The spread between 10-year US Treasury Bond and 10-year Indian Government Bond (IGBs) yields has compressed to its lowest level since 2005 recently. Currently, it is near 210 basis points. The recent INR depreciation has dampened foreign investor sentiment towards IGBs. Overall, risk-off sentiment in the last few months, as reflected by dollar index strength led to a flow bias towards developed markets.
India Fully Accessible Route (FAR) bonds will be included in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices over a ten-month period starting January 31. We have already seen JP Morgan include India bonds from June last year. How will this impact inflows and demand for Indian government securities from foreign investors as well as yields?
The Bloomberg EM Index has an estimated AUM of about $20 billion tracking it, implying $2 billion of flows staggered over 10 months, since it has a 10 per cent weightage. These flows are not sizeable for the IGB market. Additionally, many FPIs are already well-positioned in India government debt over the last couple of years. Therefore, incremental flows as well as yield impact is expected to be limited.
Indian bonds included last year in the JPMorgan Government Bond Index-Emerging Markets will fail to draw as much money as earlier expected and may fall short of an initial $25 billion to $30 billion passive flow that was estimated to come in after their inclusion. Your thoughts on the same.
Inflows in IGB FAR since October 2023 are $18.8 billion. We don’t expect this number to rise meaningfully due to low risk premium in IGBs over US Treasuries and INR depreciation worries. Besides, many FPIs were already positioned in IGBs.
Gold and silver have seen a good run in 2024. What is your outlook for the metals going forward?
Gold is facing headwinds near-term as the market adjusts to the new US administration’s economic policies, which may bring about higher inflation and a stronger USD. There is also a risk that emerging market central banks may reduce their gold buying if they need to use their FX reserves to defend their currencies. Yet, ongoing macro uncertainty and rising global debt levels remain supportive, and investors may continue to increase their exposure to the yellow metal, the last remaining safe haven asset. BofA research forecasts that gold will touch $3,000/oz by the end of 2025.
The silver market has rebalanced on production discipline and demand from new applications including solar panels. As more spending on solar panels come through, silver should rally. Bottoming out of the global economy in 2025 should also help industrial demand. BofA research forecasts that silver will touch $40/oz by the end of 2025.
Published on February 5, 2025