Stock Inflows, Current Account Surplus Lift Indian Rupee

(Bloomberg) -- India's strongest surplus in more than a decade is supporting a currency battered by the worst pandemic outbreak in Asia.

The currency has advanced more than 2% in the third quarter, outperforming the Indonesian rupiah, its high-yielding counterpart that has sunk around 4%. The gains come even with an economy ravaged by 6.7 million infections.

The support comes from a rare current account surplus, stock inflows and asset sales that had already seen billions of dollars in inflows. The country could post $72.5 billion in balance-of-payment surplus for the fiscal year ending March, according to Barclays Plc. That would be the most since the year ended March 2008.

“The very bearish macro backdrop has counter-intuitively been the driver of supportive rupee tailwinds as the FY21 current account moves into a surplus, while the FDI pipeline remains strong,” according to Ashish Agrawal, a strategist at Barclays.

A shrinking trade deficit saw India post a record current account surplus in the April-June quarter. The nation's stocks have lured $6.5 billion of inflows in the third quarter largely due to share sales by banks. The sale of stakes in billionaire Mukesh Ambani's Reliance Industries Ltd. telecom business helped, and he's also selling part of his retail business.

The question now is whether the rupee can continue to hold up in the final months of the year as the economy shows few signs of improvement and the hands of policymakers are tied by high inflation.

Consensus forecasts by analysts surveyed suggest the rupee could struggle in the fourth quarter. The median estimate is for the the currency to end the year at 73.83 per dollar, slightly weaker than the 73.2313 it was trading at on Tuesday.

“India's economy is in worse shape than its peers,” said Hugo Erken, senior economist at Rabobank International. It has “one of the most severe GDP crunches, a weak recovery in high-frequency data combined with stubbornly high inflation, rapidly sliding fiscal metrics, ongoing high stringency to contain the coronavirus, and little if no policy options to revive the economy.”

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