Evaluating India as an Opportunity Today
Given this illustration, we believe it is impossible to evaluate the case for India’s equities without also considering factors that could potentially influence the performance of its currency in a positive way. Even with the S&P BSE SENSEX Index hitting record highs, it’s just as important to think about the things that can keep the currency from sliding back in the future.
Over the last seven months, several developments have enhanced the resiliency of the Rupee and create a stronger backdrop for US investors to allocate to Rupee denominated assets.
• Renewed Central Bank Credibility – The new central bank governor, Raghuram Rajan has helped restore market confidence in the inflation fighting credentials of the Reserve Bank of India, by pro-actively hiking rates to stem inflationary pressures. Additionally, the RBI has re-built FX reserves and re-anchored FX expectations, reducing volatility.
• Reduced external vulnerabilities – The current account deficit has improved dramatically. At close 2% of GDP, it is less than of last year’s 4.7% deficit. Solid export growth amid a curb in gold imports and a fall in non-oil imports triggered the improvement.
• Less Heat from Inflation – The pace of headline inflation has turned significantly dropping from double-digits to 8% for consumer price inflation (CPI). Core CPI, however, remains sticky at 8%. Inflation expectations remain elevated, providing some underpinning to the RBI’s more hawkish stance.
• Greater Fiscal Restraint – The government has slowly worked to tighten the government’s belt in the last year. The recently proposed fiscal deficit of 4.6% of GDP exceeded expectations of 4.8%.
• Building consensus for pro-business candidate – Though elections do not start until April, a consensus in the polls is forming behind Narandra Modi and his opposition Bharatiya Janata Party (BJP). A growing number of strategists and business leaders feel that the prospects for change under the BJP could inject an immediate boost to investor confidence. The confidence is likely to be extremely supportive of the Rupee and Rupee-denominated assets.
These developments have fostered investor sentiment that India is pro-actively addressing its vulnerabilities and unlocking the growth potential that has stagnated in recent years.
Conclusion: Should We Have Been Hedging the Rupee?
As we consider all these factors, we hope that the divergence between the concept of record highs and the experience of U.S. investors has become clearer. The astute reader might question one thing, however: Given WisdomTree’s success with currency-hedged equity strategies, an obvious answer could have been to simply hedge the rupee. In a future blog post, we will address why this may not be the best approach to solving the disconnect between India’s equity and currency performances.
1Source: Bloomberg.
2January 8, 2008: SENSEX level at 20,873.
3November 5, 2010: SENSEX level at 21,004.
4Source: Bloomberg; refers to 8/28/2013, when it took 68.83 rupees to purchase 1 U.S. dollar.
5July 28, 2011: rupee vs. U.S. dollar exchange rate was 44.07.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance.
WisdomTree Head of Fixed Income & Currency Rick Harper contributed to this piece.