India’s rupee is the latest emerging market currency to find itself in the spotlight as U.S.-China trade tensions take a renewed toll on investor appetite for risky assets.
President Donald Trump late Monday followed through on his plan to impose tariffs on an additional $200 billion in Chinese goods, which was met by promises of retaliatory tariffs on U.S.-made goods by China. The trade troubles between Washington and Beijing have weighed on risk sentiment and thus riskier emerging markets assets across the board, and the rupee’s recent selloff draws attention after both Argentina
saw their respective currencies spiral to record lows and into crisis.
traded around a record low against the dollar on Tuesday and has been one of the worst performing Asian currencies this year so far. Since January, the buck rallied more than 14% against it, according to FactSet. One dollar last bought 72.86 rupees on Monday.
“The Indian government said on Monday that overseas investors buying rupee-denominated bonds issued by Indian entities will not need to pay tax on their interest income, as it attempts to encourage capital inflows and support the rupee,” said Qi Gao, Asia emerging market currency strategist for Scotiabank.
“The portfolio outflows from India have been quite dramatic throughout this year and this uncertainty is only exacerbating the effect,” said Brad Bechtel, managing director in FX at Jefferies. “Until those flows turn around, the rupee will remain under pressure regardless of central bank response.”
Late Friday, India Minister of Finance and Corporate Affairs Arun Jaitley announced measures aimed at shoring up the rupee “but market participants are not viewing the results too favorably,” Bechtel said. The measures included curbing nonessential imports, easing overseas borrowing requirements for the manufacturing sector and relaxing rules for banks issuing rupee-denominated overseas bonds — known as Masala bonds.
“The government estimates that these measures will result in net capital inflows of around $8-10 billion,” wrote Sue Trinh, head of Asia FX strategy at RBC. “We think the market was looking for more aggressive measures and the policy response announced so far will disappoint.”
“The government is probably holding back more measures depending on market developments, but we would likely need to see further significant rupee depreciation or underperformance” for them to come out of the woodwork, Trinh said.
India’s willingness to intervene was a positive sign, though moderation in consumer prices, which stood at 3.7% year-over-year in August and undercut expectations of 4%, could weigh on expectations for an interest-rate increase by the Reserve Bank of India in October. Raising interest rates commonly strengthens a currency against its rivals.
The next level to watch was a break above 73.40, which would open the dollar-rupee pair up to test 74, Bechtel said, adding the latter level would be “a great place to sell.”
“A move through 72.00 would be an all clear vote by markets and we would want to sell that break for a move down to 69.11, the current 100-day moving average,” he said.
Still even as the EM contagion fears seem to have reached India’s shores, it was important to remember that it was fundamentally different from the likes of Turkey, argued Stephen Gallo, European head of FX strategy at BMO. Turkey — as well as Argentina — were so quick to spiral into their selloff as sentiment deteriorated because both have high external debt balances. The trade-war inspired risk-off sentiment strengthened the U.S. dollar, all the while the Federal Reserve continued down its interest rate raising path, making the external funding needs of emerging markets more expensive.
But India “boasts a relatively low external debt ratio compared with more vulnerable countries such as South Africa or Turkey,” Gallo said. Economic growth was also accelerating this year and “despite higher energy prices and a weaker rupee, retail price inflation has remained close to the RBI’s target,” Gallo said.
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