Goldman Sachs sees RBI measures cushioning rupee fall, expects USD/INR to stabilise
New Delhi, June 8
Global investment bank Goldman Sachs has said the Reserve Bank of India's recent policy measures are likely to help contain depreciation pressures on the Indian rupee by supporting foreign capital inflows and strengthening the country's external balance sheet, even though the currency may not witness any sharp appreciation.
In its Global FX Trader report, Goldman Sachs said there is an increasing case for including the Indian rupee in diversified emerging market carry trade portfolios, citing improved yield attractiveness and supportive regulatory measures announced by the RBI.
The brokerage noted that the rupee's carry returns have risen significantly since the onset of the US-Iran conflict and are now higher than those offered by several other high-yielding Asian currencies.
"Carry levels in the INR have increased since the beginning of the US-Iran War, and they are now higher than other Asia high-yielders (IDR and PHP) and even higher than some other popular carry candidates across EM such as ZAR and MXN," the report said.
According to Goldman Sachs, while the rupee remains broadly fairly valued on a trade-weighted basis and relatively strong against some regional peers, it has become one of the more undervalued emerging market currencies against the US dollar when measured through the firm's valuation metrics.
The report highlighted a series of RBI measures aimed at attracting foreign investment and reducing pressure on India's balance of payments. These include tax exemptions on capital gains and interest income earned by foreign investors in government securities, broader access for overseas investors to ultra-long-duration government bonds, and exemptions for banks raising foreign currency bonds and deposits.
Goldman Sachs believes these steps could help offset portfolio outflows and improve foreign investor participation in Indian debt markets.
Explaining the likely impact of the central bank's actions, the report said, "Taken together, these considerations should limit the depreciation pressure on Rupee, but to be clear, we do not expect substantial spot appreciation either."
The brokerage added that any fresh capital inflows generated by the RBI's measures are likely to be utilised by the central bank to rebuild foreign exchange reserves and reduce its short forward positions rather than allowing a sharp strengthening of the currency.
"We expect that any renewed capital inflows should and will be used to rebuild the reserve buffer and unwind the short forward book," Goldman Sachs said.
As a result, the firm expects the dollar-rupee exchange rate to remain broadly stable over the coming quarters. "In that sense, we envisage a plateau in the USD/INR cross rate," it said, while rolling forward its forecasts to 96, 96 and 97 for the three-month, six-month and 12-month horizons, respectively.
The report suggests that the RBI's recent measures could help shield the rupee from further weakness, even as global geopolitical tensions and oil price movements continue to influence currency markets.
Goldman's comments hold significance as the rupee fell to a new low of 96.9650 per dollar last month amid a surge in global crude prices and record overseas outflows from equities.
— ANI
Reader Comments
Finally some good news! The RBI is doing what it should - using tax breaks and bond access to attract foreign investors. As an Indian, I'm tired of the rupee constantly weakening. But Goldman is right: they won't let it appreciate sharply, which makes sense for exports. Just wish the common man wouldn't feel the pinch of inflation from imported oil. 🤞
Interesting analysis from Goldman. I'm not an economist, but the idea of including INR in carry trade portfolios sounds promising if yields stay attractive. However, geopolitical risks like the US-Iran situation could easily undo any progress. The RBI's forward book reduction is smart - they learned from 2013. Let's hope this plateau holds.
I trust the RBI more than Goldman Sachs honestly. The central bank has been proactive with these measures, but will foreign capital actually come? India's debt markets are still not as liquid as others. And at 97 per dollar, my NRI friend said he's thinking twice about sending money home. Need more structural reforms, not just financial engineering.
Goldman's report seems too optimistic. They say no sharp depreciation, but the rupee already hit a low of 96.97! The RBI's measures might limit outflows, but with global oil prices soaring, it's hard to see how the rupee won't slip further. Let's see if the "plateau" holds when the next crisis hits. I'm skeptical.
As a student studying economics, this is fascinating. The tax exemptions on capital
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