Indian Rupee forecasted to gain, seen as being undervalued by Barclays while RBS say INR has seen the worst

Details

Category: Exchange Rates

Published on Monday, 25 June 2012 12:07

Written by Will Peters

"All this bodes well for the stabilisation of the INR although appreciation is contingent upon strengthening of the capital account" - RBS.

• Will is on

• Subscribe for FX Updates to your inbox

• International Money Transfers at our sister site

  ---

The Indian Rupee (Currency:INR) may have witnessed the worst of its recent declines according to an FX market analysts from both Barclays and RBS.



A quarterly FX note from Barclays notes that, "in Asia, the KRW and INR appear as the  most undervalued currencies. Domestic economic conditions (tight labour markets, elevated inflation expectations) suggest that the central bank would be more comfortable with FX appreciation once external risks recede."

However, Barclays do offer some caution on the Indian currency:

"For the Indian Rupee, disappointment in the RBI’s inaction (the market was expecting a cut) compounds its twin deficit issue and the paucity of FDI flows.

"As such, it is not one of our favourites despite selling off in the past six months."

RBS advise that, "the worst for the INR is behind although it is early too call for an appreciation."

The long-standing view at RBS has been the stabilisation of the INR is contingent upon either the re-ignition of the reforms process or a significant loss in momentum.

The latter, which is the emerging scenario, will scale down import demand thereby realigning external funding requirements with availability.

And indeed, the monthly trade deficit declined to USD13.5bn in April from the annual peak of USD15.1bn.

The January-March quarter GDP data showed that net exports had turned positive for the first time in nearly six years with real imports growing by only 2% yoy.

RBS say improving conditions in India are likely to see the INR stabilise:

"The breakdown of imports will become available only with a significant lag but considering data from the World Gold Council, gold imports, a critical pressure point on India's external position, have declined sharply.

"The full benefits of lower oil prices have yet to be reflected, an important thumb rule is that India's current account deficit declines by 0.5% of GDP for every USD10/barrel reduction in oil prices.

"On the capital account, portfolio flows remain volatile and FDI remains weak, but the gap between the monthly trade deficit and identifiable flows such as FDI, portfolio capital, non-resident Indian deposits and external borrowings has decisively narrowed down.

"All this bodes well for the stabilisation of the INR although appreciation is contingent upon strengthening of the capital account."