Why Does Goldman Sachs Believe The Rupee’s Fall May Be Nearing A Bottom?
Global investment bank Goldman Sachs believes the Indian rupee’s recent depreciation may be approaching a floor following a series of measures announced by the Reserve Bank of India (RBI) and the central government to attract foreign capital.
The assessment comes after the rupee touched a record low of 96.9650 against the US dollar last month amid surging crude oil prices, rising geopolitical tensions in West Asia, and significant foreign portfolio outflows from Indian equities.
According to Goldman Sachs analysts led by Kamakshya Trivedi, the latest policy measures should help contain depreciation pressure on the Indian currency and stabilize the dollar-rupee exchange rate in the coming months.
The brokerage noted that while the rupee may not witness a sharp appreciation, the likelihood of a significant further decline has reduced considerably.
What Measures Have RBI And The Government Introduced?
The government’s latest package is aimed at attracting foreign capital and strengthening India’s external position amid rising pressure on the balance of payments.
Among the key measures announced are tax exemptions for foreign investors on investments in government securities, broader access for overseas investors to government debt markets, and incentives for banks raising foreign currency deposits and bonds.
The RBI has also expanded the universe of securities available under the Fully Accessible Route (FAR), allowing greater participation from foreign investors in India’s sovereign bond market.
Market experts estimate that the combined measures could potentially attract between $40 billion and $50 billion in foreign capital inflows, helping offset pressures arising from higher oil imports and capital outflows.
How Has Goldman Sachs Revised Its Rupee Forecast?
Reflecting its improved outlook, Goldman Sachs has adjusted its short-term forecast for the Indian currency.
The investment bank now expects the dollar-rupee exchange rate to be around 96 after three months, compared to its earlier forecast of 97.
Its six-month forecast remains unchanged at 96, while the 12-month outlook has been revised slightly higher to 97 from the previous estimate of 96.
The revised projections suggest Goldman expects relative stability rather than a sharp depreciation toward the psychologically important 100-per-dollar level, which some market participants had feared after the rupee’s recent weakness.
Why Does Goldman Not Expect A Sharp Rupee Recovery?
Despite the positive impact of the latest measures, Goldman Sachs does not anticipate a substantial appreciation in the rupee.
The bank believes that any fresh foreign inflows are likely to be utilized by the RBI to rebuild foreign exchange reserves and reduce its short forward currency positions rather than actively pushing the currency stronger.
Goldman also noted that the rupee’s performance remains broadly consistent with other major energy importing currencies in Asia, many of which have faced pressure due to higher crude oil prices following the West Asia conflict.
As India imports a significant portion of its energy requirements, rising oil prices naturally increase demand for dollars and place downward pressure on the rupee.
Why Is The Rupee Becoming Attractive To Investors Again?
One factor supporting Goldman’s outlook is the rupee’s improved carry trade appeal.
Since the escalation of tensions involving Iran, India’s interest rate differential has become more attractive relative to several other emerging market currencies.
According to the bank, the rupee now offers higher carry than currencies such as the Indonesian rupiah and Philippine peso.
Goldman also believes the rupee has become one of the more undervalued currencies within the emerging market universe, creating opportunities for investors seeking yield and diversification.
As a result, the bank sees a growing case for including the Indian rupee in diversified emerging market carry trade portfolios.
