Rupee Forecast to Rise to Rs. 50 per Dollar on Forex Inflows

India’s rupee will rise at least 10 percent in 2013, its biggest gain in six years, as central bank interest-rate cuts spur growth in Asia’s third-largest economy, according to the most-accurate forecaster.

The currency will strengthen to 50 per dollar, according to Commerzbank AG, which had the closest estimates in the last six quarters as measured by Bloomberg Rankings. Dollar-based investors will earn 14.9 percent, including interest income, from holding rupees this year, based on the median estimate in a Bloomberg survey and prevailing deposit rates. That would be the highest in the world and compares with 8.5 percent on Mexico’s peso and 6.9 percent on China’s yuan.

“With rate cuts you get the inflows into equities and bonds,” Charlie Lay, Singapore-based foreign-exchange strategist at Commerzbank, said in a Jan. 4 telephone interview. “The economy is showing signs of stabilization.”

Global funds have increased holdings of Indian debt by 26 percent since the end of 2011 to a record, while investors poured almost $25 billion into stocks last year as Prime Minister Manmohan Singh unveiled measures to improve growth and public finances. Inflows will rise further as easing inflation allows the Reserve Bank of India to lower the highest borrowing costs among major Asian economies, according to Westpac Banking Corp. and Barclays Plc, the third- and fourth-best forecasters.

Currency Forecasts

Standard Chartered Plc, ranked second, and Westpac predict the rupee will appreciate to 53 per dollar by the end of this year, while Barclays forecasts a level of 53.50 toward the end of 2013. The currency fell 0.1 percent to 55.3050 on 8 January. It declined 3.5 percent in 2012 after a 16 percent plunge in 2011.

Inflation slowed to a 10-month low of 7.24 percent in November, the latest period for which figures are available, and will drop to 7 percent by June. Price gains have remained above the RBI’s comfort level of 5 percent for the past three years and are the highest among the world’s largest emerging markets. Industrial output unexpectedly rose 8.2 percent in October after contracting 0.7 percent the previous month, government data show.

Capital Inflows

Foreign funds have raised investments in rupee-denominated debt by $7.1 billion since the end of 2011, latest regulator data show. The holdings touched a record $33.3 billion on Jan. 3. Overseas purchases of the nation’s stocks last year were the most among 10 developing-Asian markets tracked by Bloomberg, excluding China. Indian equities saw a withdrawal of $512 million in 2011.

The cost of insuring using five-year credit-default swaps the debt of government-controlled State Bank of India (SBIN), considered a proxy for the sovereign by some investors, slid 200 basis points to 195 since the end of 2011, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

‘Cannot Ignore’

The shortfall in India’s current account, the broadest measure of trade, widened to $22.3 billion in the three months through Sept. 30, government data showed Dec. 31. Indian exports fell for the seventh straight month in November, the longest stretch of declines since the 2009 global recession, as Europe’s debt crisis curbs overseas sales.

The current-account deficit will be funded by capital inflows, according to Barclays, which expects purchases of Indian assets to increase after U.S. lawmakers averted more than $600 billion of tax increases and spending cuts that were to take effect this year. One-year implied volatility, a gauge of expected moves in exchange rates used to price options, fell to 15 basis points to 9.55 percent today.