Indian Rupee May Outperform Asia FX As US Poll Brings Volatility

The Indian rupee may have been Asia's worst-performing currency last quarter, but it is poised to be the most resilient to the dollar's strength ahead of too-close-to-call US elections, according to analysts.

“We expect the rupee to outperform peers during times of dollar strength, and underperform during times of dollar weakness,” said Vivek Kumar, an economist at QuantEco Research. “This is likely to be engineered by the Reserve Bank of India, which has support from record high reserves and stable domestic macros.”

The rupee's recent performance against Asian peers reflects this. The currency outperformed its Asian peers in the first two quarters of the year when the dollar strengthened, while the currency was the worst performer in the third quarter when the greenback weakened.

The dollar has regained strength in October, and with US elections less than a month away, pressure on Asian currencies may pile up. Donald Trump's policies are broadly linked to a stronger dollar as he advocates tax cuts and tariffs, which drive up interest rates.

Even while the rupee holds near a record low, it remains one of the least volatile currencies in the world thanks to the central bank's tight grip on it — a factor that helped burnish the appeal of Indian assets in a year when a volatile dollar wreaked havoc in many foreign-exchange markets.

The rupee fell to a record low of 84.0975 per dollar last week, and was trading steady on Friday.

Vocal Governor

Armed with record foreign-exchange reserves, RBI Governor Shaktikanta Das has been very vocal about the need to protect the economy from risk-off events by tamping down on currency volatility. Reserves swelled past $700 billion last month as the central bank bought inflows into the nation's equities and bonds this year. 

“We want to prevent excessive volatility within a short period,” Das said in a speech last month in Singapore. “We want a kind of orderly depreciation or appreciation. We do intervene in the market with this approach.”

IDFC FIRST Bank expects the rupee to remain around 84 to the dollar by December. The currency has fallen about 1% this year. Barclays Plc expects the rupee to drop toward 84.40 per dollar in a staggered manner on the back of a rise in crude prices, record gold prices, a stronger dollar as well rising risk aversion, it said in a note.

“RBI intervention has focused on limiting two-way volatility in the dollar-rupee,” said Gaura Sen Gupta, chief economist at the lender. “Adequate FX reserves will enable RBI to limit volatility in the pair.”