Mumbai: Foreign investors in local markets have historically factored in the rupee’s depreciation versus the US dollar, but stronger macroeconomic fundamentals, sweeping improvements in market infrastructure, and formidable central bank reserves have started to reverse that template, a top DBS Bank India executive said.
“Vis-a-vis, the rest of the world, the earlier story of a regular rupee depreciation will start to dissipate. While we are going to be a function of global markets, the rupee bonds will actually outperform the US and the rest of the developed markets,” Ashhish Vaidya, head, treasury & markets, DBS Bank India, told ET.
Over the past year, the rupee has displayed considerable resilience versus the dollar despite expectations of the Federal Reserve keeping rates higher for longer, giving a global boost to the American currency. In 2023, the rupee depreciated 0.8% against the dollar while volatility in the currency plunged to multi-year lows, even as other regional peers witnessed swings. So far in 2024, the local currency has shed 0.4% versus the dollar.
Besides better domestic inflation management and the impact of the upcoming inclusion of Indian sovereign debt in global bond indices, Vaidya cited developments in technology as a key driver of overseas interest.
“The entire tech stack of Indian financial markets – which the RBI and other players have facilitated – is a phenomenal one. From a liquidity sense, we will be one of the foremost markets to provide liquidity to investors for entry and exit at a reasonable cost,” the veteran trader said.
Starting June, Indian government securities will be included in a widely tracked JP Morgan index, while a similar process will be facilitated for a Bloomberg index in January next year. Analysts expect significant foreign inflows – in the region of $20-$40 billion – from these steps.
“Structurally, rupee yields are going to perform better. If I look at US rates coming down from around 5.25% to, say, 4.75% or 4.50%, then I think our 10-year bond yield could descend to a level where it’ll almost be kissing the current repo rate of 6.50%. It should be anywhere between 6.50% and 6.75%,” Vaidya said. The domestic 10-year bond yield closed at 7.13% on Friday. Bond prices and yields move inversely. A decline in government bond yields brings down the cost of borrowing across the economy.
Providing a view on the rupee’s trajectory, Vaidya said the only vulnerability the local currency faced was a potential worsening of geopolitical tensions and a consequent rise in oil prices.
“Everything else is in favour of India. While the oil import Bill is an important component of our foreign exchange usage, the government has been doing a lot in terms of electrification, technology, hydrogen all of which will show results in a few years and reduce import dependency,” he said.
Vaidya expects the rupee to trade in the range of 82.50-83.00/$1 by the end of 2024, barring fresh global shocks. The rupee was at 83.55/$1 on Friday.
