Adding coverage of Indian Rupee (INR) and Malaysian Ringgit (MYR)

Tom Tong29/Jul/2013Currency Updates

Special report – Adding coverage of Indian Rupee (INR) and Malaysian Ringgit (MYR

Given our growing customer base in both currencies, we are now adding coverage and forecasting of the Indian Rupee (INR) and the Malaysian Ringgit (MYR).

INR

The INR received a serious shock last week when the Reserve Bank of India (RBI) announced that it would defend the weakening currency through sharply higher interest rates. The Marginal Standing Facility was pushed from 100 bp above the policy rate to 300 bp, or 10.25%, and announcing later that the bank’s ability to borrow at a lower rate directly from the RBI at the policy rate would be sharply curtailed. This amounts to a sharp squeeze in the cost and availability of betting against the Rupee.

These measures have brought about stabilization to the INR, which had been the second worst performing major emerging markets currency over the past two months. However, the medium-term fundamentals are mixed.

Figure 1: USDINR exchange rate for the last 12 months (Source: Bloomberg)

  1. The current account deficit is high, but is improving. The full year deficit now stands at nearly 5% of GDP, although the latest quarter numbers show an improvement driven by lower commodity prices.

Figure 2: India current account last four years (Source: Bloomberg)

  1. INR depreciation actually has a negative impact on Indian economic growth. Indian imports are commodities priced in dollars, so INR devaluation drives up inflation rather than stimulate economic activity. Recent downside surprises in PMI indices and industrial production add downside risks for GDP growth, which will make it harder for the RBI to sustain high rates to defend the currency
  1. The real policy rate is positive. Furthermore, the liquidity squeeze has effectively lifted the rate to double digits, which means that the real rate in India is one of the highest among major world economies.

With different indicators pulling in different directions, we think that the RBI stabilization measures will be successful over the short term. However, we think that their impact of growth raises questions about their sustainability, and expect the depreciating trend in IR to resume over the medium term.

USD/INR
Q313 59
Q413 59
Q114 60
Q214 62
E2014 63

MYR

The Malaysian Ringgit (MYR) continues to be just about the most stable currency in the entire ASEAN region. It has weathered the recent turmoil in emerging market currencies very well, experiencing a depreciation of less than 3% since US yields spiked in mid-June.

Figure 3: USDMYR exchange rate for the last 24 months. (Source: Bloomberg)

The Malaysian central bank, Bank Negara, pursues a policy of maintaining FX stability, although there is no official peg or target. We think that Bank Negara will be successful in maintaining the Ringgit near current levels against the USD, in spite of our forecast for general EM currency depreciation.

  1. Although narrowing, the current account balance is strongly positive, set to end up 2013 in the high single digits as a percentage of GDP. Malaysia will continue to be a net creditor to the rest of the world for the foreseeable future.

Figure 4: Malaysia current account last eight years. (Source: Bloomberg)

  1. Malaysian macroeconomic figures are enviable, with solid growth of around 4-5% and low, stable inflation below 2%. In the past, Bank Negara has shown very little appetite for MYR depreciation as a boost to growth; this is unlikely to change any time soon, In spite of the recent weakness in the external sector.
  1. Years of double-digit current account surpluses have allowed Malaysia to accumulate a large war chest of reserves of well over half of GDP. Bank Negara has ample firepower to defend the ringgit against speculative attack.

Figure 5: Malaysia FX Reserves. (Source: Bloomberg)

We think that MYR will be one of the few emerging market currencies to buck the trend towards depreciation vs. the dollar over the medium term.

USD/MYR
Q313 3.20
Q413 3.20
Q114 3.20
Q214 3.20
E2014 3.20

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Written by Tom Tong

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