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Informist, Monday, Nov. 25, 2024

 

NEW DELHI – The Indian rupee is best positioned among Asian peers to withstand the pressure from the tariff tiff between the US and China that is likely to hurt export-oriented economies in 2025, Morgan Stanley said. Imposing tariffs on China and other large exporters is among US President-elect Donald Trump's key campaign promises.

 

"INR should be the most resilient currency in AXJ (Asia ex-Japan) from tariff risks given that it is a domestically driven economy, benefits from supply chain diversification and is least sensitive to moves in CNH (offshore Chinese yuan)," Morgan Stanley said in its 2025 Global Emerging Markets Fixed Income Outlook on Friday. "The RBI keeping INR volatility low suggests INR outperformance if USD (US dollar) strengthens, and carry is also favourable."

 

India's exports to China, at 0.5% of its GDP, are the least in the region relative to GDP, the report said. As global supply chains have restructured due to constant trade tiffs between the US and China, India has attracted foreign direct investments and its share of global exports has grown since 2017, Morgan Stanley said.

 

Among its preferred trades, the investment bank listed shorting both the offshore yuan against the rupee and the Thai Baht against the Indian unit, with both the other Asian currencies vulnerable to the trade tariffs. The Reserve Bank of India's intervention to curb volatility in the local unit will also help limit losses, even if the rupee weakens against the dollar at a time when tariffs are on the rise.

 

The rupee's real effective exchange rate could have a "strong move higher" over 2025, Morgan Stanley said, bullish on India's growth and fundamental prospects and noting its rising productivity growth against the rest of the world. India GDP is likely to grow 6.5% in 2025, with strong corporate capital expenditure and a current account deficit of only 0.7% of GDP, the report said. The rate jumped to 107.21 in October from 105.34 in September, according to data released by the RBI last week.

 

"The RBI also may make an effort to keep FX volatility low so, even though USD/INR is likely to head up, we believe that INR can outperform on a trade-weighted basis," the report said.

 

On the whole, Morgan Stanley sees Asia ex-Japan at risk from a weakening Chinese currency, and the region's currencies are likely to depreciate despite dollar weakness in 2025 from continued US rate cuts. Asia's economies may have room till June to cut rates before the hit from the US tariff regime is fully in place and threatens their currencies, the investment bank said.

 

Morgan Stanley forecasts a shallow repo rate cut of 50 basis points by the RBI's Monetary Policy Committee in Apr-Jun to 6.0%. Following that, India's interest rates are likely to be untouched till December 2026, the bank said. Asia ex-Japan rates are likely to underperform the US due to a much larger rate cut cycle by the US Federal Reserve, according to the strategists.

 

Despite the shallow rate cuts, Morgan Stanley held on to its positive stance on India's local rates market that it initiated in May. This was due to India's inclusion in global bond indices, including JP Morgan's Government Bond Index – Emerging Markets suite starting Jun. 28. The investment bank's strategists preferred going on India's 10-year government bond, hedged for currency fluctuation with a target yield of 6.70% and a stop-loss of 6.95%. On Monday, India's 10-year benchmark 6.89%, 2034 bond ended at 6.82% yield.

 

"Should CNH (offshore Chinese yuan) weaken, the RBI could be less aggressive in capping the USD/INR upside," the report said, explaining the reason for the currency hedge. "Meanwhile, the bond curve should be anchored by a relatively cautious RBI and GBI-EM index inclusion. We expect the GBI-EM inclusion could bring in $30 billion of inflows."

 

With US yields and the dollar likely to remain strong for the rest of the calendar year, the investment bank recommended jumping into its preferred trades in Asia only in Jan-Mar, when the dollar shows signs of easing. It acknowledged the near-term risks from the incoming US government, with Trump scheduled to take oath as US President on Jan. 20.

 

"The consensus on EM (emerging markets) post-US elections is cautious. Yet, we think the most likely path is for lower US Treasury yields and DXY (dollar index) from Jan-Mar," Morgan Stanley said. "However, local bond index yield differentials likely widen, leaving our forecast for double-digit total returns dependent on US Treasuries."  End

 

US$1 = INR 84.29

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

 

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