Benign interest rates in developed countries and expectations of a strong rupee in the medium-term may continue to attract foreign investments into Indian debt, equity and real estate, a senior market official said.
The Federal Reserve is expected to hold interest rates this year as the US economy doesn't show definite signs of recovery, while rates in India are headed higher and the current account balance may turn positive, attracting investments from overseas.
"There is both interest rate differential as well as growth differential between the west and east," Ananth Narayan G, head of rates, foreign exchange and credit (South Asia) at Standard Chartered Bank told Reuters in an interview.
"So, people are borrowing cheap dollars with the anticipation dollar interest rates will not go up and using that to fund investments in the east, including India," he said.
Indian stock markets are driven largely by foreign investments, helping the benchmark index in 2009 record its biggest annual gain since 1991, while attracting their interest in debt is crucial for the country's infrastructure sector.
The total net foreign inflows into equity and debt in India stood at about USD 3.3 billion so far in January. Dealers suggest that investments in corporate bonds stand at about USD 5 to USD 6 billion as of now, of which around USD 2 billion came in January.
Standard Chartered Bank expects the rupee to rise to 45 per dollar by March-end and 42 by December-end, from 46.10 currently, Ananth Narayan said.
"We don't expect Fed to hike rates in this year at all. They may hike only in 2012," he added.
However, the risks of another sharp downturn in 2010 cannot be ruled out, given the recent financial turmoil in Dubai, Greece and US commerical real estate sector, which could weigh on emerging market currencies, although chances were low, he said.
The government permits foreign investments of upto USD 15 billion in corporate debt and USD 5 billion in federal bonds.
Exporter hedge
Foreign fund investments in 2009 helped the rupee claw back more than 12% from its record low of 52.2 touched in March last year. In 2008, net outflows of more than USD 13 billion, had pushed the rupee down by a fifth.
With the rupee expected to rise going ahead, exporters have now begun increasing their hedge ratios, Ananth Narayan said.
"Over the last 12-18 months, we have seen a lot of importers covering and not so much of exporters covering and given the wide moves we saw in dollar-rupee, the tendency has been for exporters to stay quiet and importers to hedge themselves. So, that might even out or reverse," he said.
Standard Chartered expects the current account balance to be positive in the June quarter as remittances tend to be good and trade deficit low, Ananth Narayan said. India's current account was at a deficit of USD 12.63 billion in September quarter.
"First quarter the current account side is generally positive for the rupee and on the capital side as well the flows will continue between the IPOs..., 3G if it does happen," he said.
"In general there is a lot of interest in emerging markets and in India," he said.
Source: ReutersCourtesy moneycontrol.com
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