Goldman Sachs On INR

"Underperformance for good and less good reasons. The INR has underperformed other Asian currencies this year, and that underperformance continued in the past week. In particular, in recent sessions, foreign equity outflows on the back of the release of a third-party report on leverage in the Adani Group likely added to the pressures. At this stage it does not look likely that this will become a systemic risk for the banking system or credit markets in India on the basis of publicly available disclosures provided by the company. The RBI also released a press statement on Feb 3, assuaging concerns about the health of the banking sector, and said that the sector remains “resilient and stable”. Still this volatility bolsters the case for rotation from Indian equities (which were strikingly resilient last year) to Northeast Asia (where China’s pro growth pivot has further to run) that our equity strategy team have been arguing for; and foreign equity outflows from India have amounted to USD 3.6bn year-to-date, reversing the USD 12bn inflow observed in H2-2022. On the FX front, India's goods trade deficit remains elevated driven mainly by an increase in imports as domestic demand remains resilient. But more importantly we have argued that the Rupee should be an underperformer since we expect the RBI to lean against any inflows and replenish their FX reserves which dropped by more than USD 100bn in 2022 to trough at USD 520bn in October last year. This appears to already be materializing, as FX reserves rose by USD 50bn over the past three months since the US dollar peaked. Overall, this should limit the volatility in the currency, and keep it among the top EM candidates on a carry-to-vol basis, even as it underperforms on a spot basis."