The Indian rupee is expected to outperform its Asian peers in the coming months, despite the uncertainty surrounding the Federal Reserve's rate hikes. The currency's improved macroeconomic fundamentals, along with the Reserve Bank of India's proactive approach to market volatility, will help it weather the storm better than most of its peers.
Improved Macro Fundamentals
The Indian economy has been showing signs of improvement, which has strengthened the rupee. India's merchandise trade deficit has fallen to a 12-month low as of January, reducing concerns over the widening current account gap, a key risk to the rupee. Additionally, lower oil prices and equity inflows are supportive of the currency. Ashish Agrawal, head of Asia FX and EM macro strategy research at Barclays, says, "the rupee's carry is attractive and volatility is low." A currency carry trade is a strategy where a high-yielding currency funds the trade with a low-yielding currency.
Proactive Approach by the Reserve Bank of India
The Reserve Bank of India's "hands-on" approach has contributed to the rupee's stability. The central bank has sold dollars in both onshore and offshore markets to prevent the currency from slipping to fresh record lows. The RBI has stated publicly that it does not defend any particular level of the currency but intervenes to smoothen volatility and avoid extreme moves in the currency. The RBI sold about $46 billion in the spot market in 2022 when the rupee ended as one of the worst-performing regional currencies. The currency underperformed its peers between November 2022 and January 2023.
Opportunities for Investment
Despite the Fed's uncertain rate path, the Indian rupee is poised to perform well against North Asian currencies like the South Korean won and the Taiwanese dollar. According to Chidu Narayanan, Asia rates and FX strategist at BNP Paribas, "We continue to look at the rupee's recent underperformance as a potential opportunity to position for strength against North Asian currencies." Wei Liang Chang, FX and credit strategist, DBS Bank, says that these economies are likely to suffer from a worsening outlook for global manufacturing, which India is shielded from due to its strong domestic demand. He adds, "that's probably a bit more negative for the North Asian currencies versus the Indian rupee."
Conclusion
Despite the uncertainty surrounding the Federal Reserve's rate hikes, the Indian rupee is expected to outperform its Asian peers in the coming months. The currency's improved macroeconomic fundamentals, along with the Reserve Bank of India's proactive approach to market volatility, make it an attractive investment option. Investors looking to invest in Asian currencies should consider the Indian rupee as it is well positioned to weather the storm.
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