Indian Rupee to Benefit from Strong Fundamentals in 2017 say HSBC

The Indian Rupee has a lot of positive factors supporting its outlook, says HSBC’s Asian FX Strategist, Alastair Pinder.

“The INR should outperform in the region thanks to a more hawkish central bank but also positive reform momentum, which the government made further progress on in the latest budget,” said the analysts in a note seen by PSL from HSBC.

On a regional level, the Rupee is at an advantage against the Dollar as India is one of the least exposed economies in the region to the US, so any trade war launched by Trump, or even an excessive appreciation of the US Dollar will not impact on India as much as some of its neighbours. .

India’s highly diversified economy makes it more resilient to economic shocks in general as it boasts manufacturing, services and commodity industries in equal measure.

The Pro-INR Budget

The recent budget at the start of February is one major reason for analysts taking such a pro-INR stance.

“Overall, we believe the government budget coupled with the RBI’s decision are positive for the INR. The decision to stick to fiscal consolidation, while embarking on pro-growth policies, such as reducing corporate and income taxes, will help economic growth and maintain strong foreign direct investment in the years to come,” said HSBC’s Pinder.

India has one of the highest corporate tax rates in the world but the budget sought to reduce this tax burden on companies by decreasing it 5% to 25%.

Apart from any other reflationary benefits, the step to reduce high corporation taxes should increase foreign investment and lead more companies to be tempted to base themselves in India, thus increasing FX demand and lifting the INR.

The government also cut income tax from 10 – 5% for those earning between 250k and 500k Rupees, in another potentially reflationary move which it is hoped will spur consumption and growth.

The biggest pro-Rupee budget policy, however, was to extend the deadline for the concessional 5% tax rate, which is levied on profits repatriated by overseas investors, until June 2020.

This carrot should keep India’s financial markets well-oiled with foreign capital and also raise aggregate demand for the INR, further supporting it.

RBA Turn Neutral

The Reserve Bank of India (RBA) was widely expected to cut interest rates at its recent meeting but instead defied those expectations by keeping interest rates unchanged, and shifting its stance from accommodative (which means more likely to cut interest rates) to neutral.

This supported the Rupee which like most currencies rises and falls in line with interest rates.

“Meanwhile, the Reserve Bank of India’s (RBI) decision to surprise the market by not easing monetary policy at its meeting on 8 February should also be supportive for the INR. The more hawkish stance (which means more likely to raise interest rates) adopted by India’s central bank, which included revising its stance to ‘neutral’ from ‘accommodative’, will help maintain India’s carry buffer,” said Pinder.

The combination of pro-INR budget and hawkish RBA make Pinder overall bullish for INR.

“These events cement our bias that the INR should be an outperformer in Asia. The INR has multiple factors working for it, including an improved fundamental position, relatively high carry (albeit declining), and comparatively low FX volatility, and it is also less exposed to President Trump’s policies of fiscal spending and trade protectionism.,” Said the HSBC analyst.  

Pinder recommends expressing the positive INR outlook via a short of the NZD/INR pair.