G-Secs' likely entry into global indices helps rupee beat EM peers

Mumbai: The rupee has outperformed most of its emerging-market rivals - and even some developed market peers - against the US dollar over the past two weeks on expectations that bonds sold in the world's fifth-biggest economy will now find their rightful place in global bond indices.

Inclusion in the globally tracked gauges could bring as much as $30 billion inflows to India's debt securities, marked under the Fully Accessible Route or FAR onshore investment.

"Any wild swing in the rupee's value may upset global investor sentiment at a time when India is expected to be a part of the global bond index," said Bhaskar Panda, executive vice president at HDFC Bank. "Exchange rate stability is key for any FPI investment."

Since August 26, the Reserve Bank of India (RBI) is said to have sold about $3 billion a week, currency dealers said, referring to the increasing probability of the country's inclusion in the globally tracked bond benchmarks.

The RBI did not comment on the matter.

In this period, the rupee fell just about 0.04% against the US dollar, but it ranked as the best performing Asian currency, outpacing the Chinese Renminbi that lost 1.5%, showed data from Bloomberg.

The local unit Wednesday closed at 79.90 per dollar, down 0.08%. When the level inches close to 80, heavier dollar selling is seen to stem further slide, dealers said.

JP Morgan, which owns a key global bond index, is said to be conducting a review of its constituents this month. Global investors will likely demand India's inclusion citing concentration risk in China and exclusion of Russian sovereign bonds.

"India's ability to fund imports coupled with its sizable forex reserves and central bank's view on orderly movement of currency, should provide comfort to overseas investors amid growing talks of Indian bond's inclusion in overseas index," said Gopikrishna Shenoy, chief investment officer at SBI Life Insurance.

India' forex reserves dropped to $561 billion on August 26 from its peak of $642 billion seen on September 3, last year. But the reserves are still considered healthy.

"The rupee has been hovering in a narrow range despite global dollar strength," said Kunal Sodhani, vice president at Shinhan Bank. "Active RBI intervention is seen curtailing any kind of sharp depreciation in rupee. Lower oil prices have also acted as a breather for the rupee."

The one-month USDINR volatility index rose 31 basis points to 5.21% in the last two week. During the period dollar-renminbi gauge surged 54 basis points reflecting higher swings.

The Dollar Index, which measures the unit against major currencies soared nearly 200 basis points.

"A stable currency augurs well for India when talks of global bond index inclusion are getting louder," Sodhani said.

Although the RBI did not protect any level, the psychological mark of 80 is clearly being protected, dealers said.