#3: Knock on Effects of Sound Central Banking
Just over a year ago, Raghuram Rajan, the governor of the Reserve Bank of India, set out to strengthen the Indian economy from the ground up. After a series of interest rate hikes, his hawkish stance has finally started to bring inflation under control. Now that prices are beginning to stabilize, growth is starting to accelerate. As growth rebounds, it attracts foreign investor flows, helping to strengthen the currency and control inflation further. Also, after lessons learned during the “taper tantrum” last summer, Rajan has made significant strides in strengthening India’s primary balances. Since November 2013, Standard Chartered estimates that foreign exchange reserves have increased from $258 billion to $330 billion.2 Should the currency unexpectedly come under pressure, we believe that India is in a much-improved position to utilize these reserves in managing currency volatility.
Ultimately, the performance of Indian assets will largely be dictated by the effectiveness of government reforms in unlocking India’s economic potential. While excitement over these prospects has led to a rapid rise in Indian equities, a recent decline in the rupee could signal an attractive entry point for positions in the rupee. With short-term interest rates at 8.0%3, we believe that attractive levels of carry augment the positive reform story and could continue to support flows into the rupee for the remainder of 2014.
1Source: S&P, as of 9/26/14.
2Source: Standard Chartered, as of 9/29/14.
3Source: Bloomberg, as of 9/30/14.
Important Risks Related to this Article
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance. 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.