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Sliding Rupee Among Worst EM Currencies

FALL YEAR Indian unit has given a negative return of 1.71% since Jan 1, analysts don't rule out further weakness

The rupee seems to have lost some steam, that is, if you go by data on total investment returns, or even on the basis of pure fundamentals. Unlike the previous year, the Indian currency has clearly lost the top slot among emerging markets so far in 2016, as concerns over growth push investors to park their money in safer places, like the US.

The local unit is now one of the three worst performing EM currencies, yielding a negative return of 1.71% against 2-5% positive returns by the Malaysian Ringgit, Indonesian Rupiah, Thai Bhat and the Brazilian Real, show data from Bloomberg.

“The rupee has underperformed some of its emerging markets peers in 2016, but over a longer horizon (2014 or 2015), it had remained comparatively much stronger,“ said Saugata Bhattacharya, chief economist at Axis Bank. “This needs to be balanced with incentivising capital inflows, since the currency return of an investment in India would be lower with a falling rupee.“

There's a case for further depreciation as a relatively stronger rupee may have contributed to a loss of export competitiveness, dealers said. So far this year, foreign portfolio investors have sold a net of Rs.11,665 crore in domestic equities versus more than Rs.13,000 crore invested last year during the same period, show data from NSDL, a depository .

Last year, the rupee's total investment returns were at about 2.5% against China's 0.20%, marking the local unit as a top performer among emerging markets peers.

“With fiscal distress and macro weakness, you throw in stress banking and real estate, two major sectors for the economy,“ said Anindya Banerjee, currency analyst, Kotak Securities. “In totality, it is a macro story that is now trying to take the sheen out of the rupee as overseas investors exited India investments.“

In ter ms of Real Ef fective Exchange Rate, an indicator, the rupee has appreciated in the past two years, which gives some space for relative depreciation.

Moreover, in cross currencies, investors were earlier seen going long on the rupee while going short in other emerging market currencies suggesting short term bullishness on the local unit. But now, they are seen squaring off positions with a weakening dollar on the back of mild US rate hike expectations, dealers said. 

The Economic Times, New Delhi, 11 Feb 2016

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