Indian Prime Minister Manmohan Singh’s actions since taking on the role of finance minister spurred the biggest four-day rally in the rupee in three years and prompted bond investors to predict a third quarter of gains.
The rupee surged 4.8 per cent to 54.505 per dollar since June 27, when Singh called for capital inflows to stem the currency’s 19 per cent drop in the past year and changes to the tax regime. Indian bonds are this year’s best performers among Asia’s ten biggest local-currency markets, HSBC Holdings Plc indexes show.
Singh, who opened up India’s economy to foreign investors in the 1990s, is seeking to revive confidence after Asia’s widest budget deficit and the slowest economic growth in nine years put the country’s investment-grade rating at risk. He urged senior finance ministry officials to act quickly to revive investor sentiment after assuming the role vacated last week by Pranab Mukherjee, who resigned to run for president.
“There is a lot of hope riding on the prime minister since the credentials are in order and his track record is envious,” Killol Pandya, the Mumbai-based head of fixed-income investments at the local unit of Daiwa Asset Management Co. that oversees $225 million (Dh826.4 billion), said in an interview on July 2.
“He has the ability to think out of the box, but there are political realities.”
The rupee will rebound to 54 a dollar by year-end, according to the median estimate of 27 banks in a Bloomberg News survey.
Barclays Plc predicts the currency will reach 52 by December 31 while Nomura Holdings Plc sees it at 54.60.
The rupee, which touched a record low of 57.3275 on June 22, lost 0.3 per cent on Wednesday, according to data compiled by Bloomberg.
Singh, 79, is focusing on repairing India’s appeal to investors after Fitch Ratings and Standard & Poor’s cut their outlooks for India’s debt rating to negative from stable in the past three months.
India may become the first among the so-called BRIC nations, which also include Brazil, China and Russia, to lose its investment-grade credit ranking, S&P said in a statement on June 11.
The $1.7 trillion economy expanded 5.3 per cent in the three months to March from a year earlier, the least since 2003, according to government figures.
The nation’s current-account deficit widened to a record $22 billion in the first three months of 2012.
The government’s budget deficit was an estimated 5.76 per cent of gross domestic product in the year ended March 31, missing policy makers’ goal by 1.16 percentage points, the biggest margin since 2009.
“We are passing through challenging times economically,” Singh said in a statement in New Delhi on June 27.
“We need to work to get the economy going again and restart the India growth story. In the short run, we need to revive investor sentiment, both domestic and international.”
The immediate emphasis of the government is to manage the balance of payments and boost institutional flows into India, he said the same day in separate comments on his Twitter account.
Bond risk for government-controlled State Bank of India, a proxy for the sovereign, declined each day following Singh’s statements. The cost of insuring the lender’s debt for five years against non-payment using credit-default swaps dropped 28 basis points, or 0.28 percentage point, in the four days to 355 on July 3, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
“If policy makers deliver some bold measures, we could see some positivity and a boost to capital flows, leading to some stability in the rupee,” Vivek Rajpal, a Mumbai-based fixed- income strategist at Nomura, Japan’s biggest brokerage, said in an interview yesterday. “However, we need some actions rather than words for a material impact.”
Rajpal predicts the yield on ten-year sovereign bonds, which has dropped 40 basis points this year to 8.17 per cent, will decline to 7.80 per cent by March 2013 as investors return to Asia’s third-largest economy. The extra amount investors demand to hold the notes over US Treasuries has retreated 40 basis points from a six-month high of 694 reached on May 31, according to data compiled by Bloomberg.
Ten-year yields will fall to 8 per cent by September 30, Daiwa Asset estimates, after declining in each of the last two quarters. International investors have poured $4.3 billion into Indian government and corporate debt this year, raising holdings to $30.4 billion, exchange data show.
Indian sovereign notes returned 4.9 per cent in 2012, compared with the 2.2 per cent earned by Chinese securities and a 3.6 per cent gain in Indonesian debt, according to HSBC indexes. The yield on the benchmark 8.15 per cent government debt due June 2022 fell one basis point, or 0.01 percentage point, to 8.17 per cent, according to the central bank’s trading system.