Goldman Sachs Expects INR To Remain Attractive On A Carry To Vol Basis

The US bank expects INR's carry to vol ratio to remain attractive. It also likes EUR/INR downside.

Goldman Sachs: "Stable carry in a strong Dollar world. In an environment of relatively low FX volatility, market participants' focus has turned back to earning carry with the nominal carry in MXN and COP continuing to be the highest within EM FX. However, while these currencies remain responsive to US yield moves as we saw this week, this is not the case for the tightly managed INR that features the highest carry-to-vol ratio across EM FX versus the Dollar. We expect this ratio to remain elevated as the RBI maintains a patient policy rate stance and a tight management of FX volatility. The latter implies that (i) the trade-weighted INR has been tracking closely the trade-weighted USD and (ii) the INR’s global betas to equities, rates and oil prices have become more muted relative to history. This makes the Rupee a key, defensive component of any EM FX carry strategy. For this reason, we continue to recommend INR longs to FX investors. We have preferred to express this through EUR/INR: even if it does not offer the highest historical carry-to-vol, we think risks to EUR/USD are skewed to the downside, as we expect the Dollar to move back to the strong side of its recent range over the next few months. In terms of valuations, we find that the INR is modestly undervalued versus the USD across different approaches. We think this is mostly a reflection of the Dollar’s overvaluation signal rather than an India-specific premium. Therefore, we do not expect the conclusion of the 2024 election to lead to a large FX spot move both because we expect the Dollar to remain richly valued and the RBI's FX management to limit the scope of any FX reaction even if there is a pick-up in foreign flows into local equity and debt markets after the election."