Indian Rupee Gains Favor as Top Pick for Carry Trades Amid Stable RBI Control

Key Takeaway

• Fidelity highlights the Indian rupee as a top pick for carry trades, citing RBI's tight control for its stability and low volatility.
• Rupee outperforms regional currencies like the Indonesian rupiah and Thai baht, with high yield appeal despite near-record low against the dollar.
• India's steady interest rates and high foreign exchange reserves make it an attractive investment destination, bolstered by high bond yields at 7.20%.

Rupee's Carry Trade Appeal

The Indian rupee is emerging as a favored currency for carry trades, offering investors higher yields compared to its regional counterparts. This attractiveness is largely attributed to the Reserve Bank of India's (RBI) efforts to maintain the currency's stability, even as it hovers near a record low. Paul Greer, a money manager at Fidelity International in London, highlighted the rupee's unique position, stating it is "arguably one of the most attractive currencies on the planet" due to its combination of high yield and low volatility. Despite a slight depreciation against the dollar this year, the rupee's performance remains strong, especially when compared to the Indonesian rupiah and Thai baht, which have seen declines of more than 5%.

RBI's Strategic Interventions

The RBI's interventions have played a crucial role in stabilizing the rupee, making it one of the most stable Asian currencies. By actively managing the currency's value, the RBI has managed to keep the rupee's volatility to a minimum, as evidenced by its low 3-month implied volatility in Emerging Market (EM) Asia. This strategy, however, carries its own set of risks, as a sudden shift in policy could potentially lead to losses for traders. Greer emphasized that the attractiveness of the rupee does not stem from its potential for appreciation but from the favorable carry-to-volatility ratio that it offers to investors.

Attractive Investment Environment

India's monetary policy, characterized by steady interest rates, contrasts with the easing policies of some Latin American countries, making it an appealing destination for overseas funds. The inclusion of Indian bonds in JPMorgan Chase & Co.’s global index is expected to drive significant foreign investment into the country. India's foreign exchange reserves, which are near a record high of $643 billion, provide the RBI with ample resources to intervene in the currency market as needed. The yield on India's benchmark 10-year bond, at approximately 7.20%, stands as the highest among major Asian markets, further enhancing the country's appeal to foreign investors seeking high returns.

Street Views

• Paul Greer, Fidelity International (Bullish on the Indian rupee):

  "The rupee rewards investors with a high yield than regional peers, and together with low volatility, makes it arguably one of the most attractive currencies on the planet... Because RBI has been so tight on both sides of the range, the carry-to-volatility ratio is what many investors are attracted to."