Goldman Asset Buys Rupee to Join William Blair on Deficit

Feb 20, 2014 8:45 pm ET

(Adds IMF report from third paragraph.)

Feb. 21 (Bloomberg) -- Goldman Sachs Asset Management and William Blair Investment Management are buying the rupee as India reins in a current-account deficit that drove the currency to a record low in August.

The rupee, which slid 21 percent in the past two years, looks “cheap” relative to India’s improving external finances, according to Goldman Sachs Asset, which opened a “small long” position on the currency this year. William Blair has boosted the currency to about 20 percent of its foreign-exchange holdings for its higher yield and inexpensive valuation, said Chicago-based fund manager Brian D. Singer.

The rupee has rebounded more than 10 percent from last year’s all-time low of 68.845 per dollar as India curbed gold imports to shore up the current account and the central bank acted to spur dollar inflows. Only Indonesia’s rupiah has fallen more than the rupee among Asian emerging markets. While India’s finances have improved since last year, the nation needs a coordinated plan to respond to volatility in global currency markets as the U.S. reduces stimulus, the International Monetary Fund said in a report.

The “current-account numbers have been the key driver because it’s a very transparent measure of whether the policy prescriptions are having an impact,” Philip Moffitt, Sydney- based head of fixed income for Asia-Pacific at Goldman, which oversaw more than $1 trillion on Dec. 31, said in an e-mail interview yesterday. “If you can find something that’s relatively cheap and the fundamentals appear to be improving, it’s usually a good mix.”

‘Principal Risk’

The shortfall in the broadest measure of trade will shrink to $45 billion in the year through March from an unprecedented $88 billion the previous period, the government said Feb. 17.

“The principal risk facing India is the inward spillover from a tightening of global liquidity interacting with domestic vulnerabilities,” the IMF said in the report. Pressures associated with India’s “still-significant external financing need” could lead to higher borrowing costs, fund outflows and “disorderly adjustments” in the exchange rate, it said.

Any plan should make rupee flexibility the key defense and include measures to raise the benchmark interest rate, impose cash curbs, open foreign-exchange swap windows and raise diesel prices, the Washington-based lender said in an annual review of India’s economy.

Current Account

Dollar-based investors will earn 9 percent including interest by holding the rupee until the end of 2014, the second- biggest return in Asia, according to Bloomberg data based on appreciation estimates and deposit rates. Two-year government bonds pay 8.67 percent in India, compared with 0.31 percent in the U.S. and 3.70 percent in China. The rupee was at 62.23 per dollar yesterday.

India’s current-account shortfall decreased to $5.2 billion in the third quarter of 2013, from $21.8 billion in the previous three months, after Finance Minister Palaniappan Chidambaram raised tariffs on gold in the world’s largest bullion-consuming nation. Reserve Bank of India Governor Raghuram Rajan lured $34 billion of foreign-currency inflows by offering discounted swaps for dollars raised by banks, one of his first steps on taking office on Sept. 4.

Rajan has also raised interest rates three times so far, helping curb consumer-price inflation to 8.79 percent last month from as much as 11.2 percent in November.

Rising Confidence

Options are signaling increased confidence in the rupee as external balances improve and price pressures cool. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, has eased to 8.17 percent from last year’s peak of 22.4 percent in September, according to data compiled by Bloomberg.

Carry traders, who borrow in currencies with lower yields and buy those with higher rates, have earned 4.1 percent on rupee investments using dollars since Sept. 30, the most among 23 emerging-market currencies tracked by Bloomberg. Favorable policies will help the rupee and Indonesia’s rupiah perform better than currencies of other nations with current-account deficits such as Brazil, Turkey and South Africa, Goldman Sachs Group Inc. economist Fiona Lake wrote in a Feb. 19 report.

The appointment of Rajan, an economist credited with presaging the 2008 global financial crisis, as the RBI’s head encouraged William Blair, which oversaw more than $72 billion as of Dec. 31, to boost bullish positions on the rupee, according to portfolio manager Singer.

“The rupee is a cheap currency with significant carry,” he said in an interview in Melbourne yesterday. It “has deviated from fundamentals and should not be included in the fragile five,” he added, referring to a description used by Morgan Stanley last year to describe currencies most vulnerable to capital flight.

--With assistance from Mark Cranfield in Singapore and Kartik Goyal in Mumbai. Editors: Anil Varma, Amit Prakash