FXstreet.com (Barcelona) - Along with many market participants,
Ilan Solot, Emerging Markets Stategist at Brown Brothers Harriman
is torn when it comes to the Indian Rupee.
On balance, he thinks that the positive arguments carry the day in
the short term, but in the medium to long term, he thinks that INR
will under perform the region. In its favour, he feels that INR has
a decent growth story, the prospect of equity related flows, and
still high carry, catch up with the rest of the region, risk of
positive budget headline risks and RBI leaning against INR
depreciation. Against it, he notes current account and trade
weakness, budget deficit not improving, likely lower carry down the
line, still elevated inflation and political stagnation (to be
Solot flags politics are being the greatest negative risk, and only
sees it worsening. He writes, "The already difficult situation for
the government will only get harder. The government is being blamed
for its poor responses to the horrific crime in New Delhi last
month, which spurred mass protests."
He notes that many market participants got excited late last year
when Finance Minister Chidambaram announced his 5-year plan to trim
the budget deficit. Back then, he hoped to bring the estimated
-5.8% of GDP deficit this year to -5.1% in 2013. Then that number
was revised to -5.3%, and now we are talking about 6.0% in the
absence of substantial reforms. However, when one looks at the
consolidated public sector deficit, this number jumps to near -10%
Meanwhile, Solot highlights that the government is putting a lot of
pressure on the RBI to cut rates. The RBI has so far bravely held
its ground, but cuts are coming eventually. Some cracks are
starting to appear and a member of the RBI's technical advisory
committee recently opined that the bank has "some room to cut
rates." Indeed, he sees that India's wholesale price index fell to
a 10-month low in November (though still high at 7.2% y/y). It may
be too early for rate cuts in the January 29 meeting, but the risk
is certainly rising.
Thus, he sees it as no surprise that Fitch ratings said that India
may face a downgrade in the next 12-24 months. The agency has kept
the negative outlook on India's BBB- rating, focusing on the
widening budget and current account gaps. He writes, "We concur.
Our model saw India drop to BB+/Ba1/BB+ this most recent round,
down a notch from last time and now below actual ratings of
BBB-/Baa3/BBB-. So we think that the downgrade risk is
significant." He finishes with a technical perspective, commenting
that USD/INR needs to break the 50-day MA near 54.65 and then the
200-day MA near 54.35 first to open up a move to the downside.
After that, the major level to watch is 54.00. On the top side,
56.00 is still the key level to watch.