MNI ANALYSIS: India PMI To Support INR Outperformance

--Solid Growth And Cooling Inflation To Halt Rupee Decline

By Stuart Allsopp

     SINGAPORE (MNI) - India's manufacturing PMI rebounded to 51.6 in April from

51.0 in March, with the improvement driven by a rise in output and new orders as

well as employment. Additionally, inflationary pressures continued to ease, with

the softest increases for input costs and output charges reported since

September 2017 and July 2017 respectively.

     --RANGE TRADING VS USD

     Overall, the PMI print shows that growth in the sector remains solid and

inflationary pressures are cooling. Against such a backdrop, the Indian rupee

should outperform its regional peers given how much the currency has sold off

over recent weeks. Currently at 66.83, USDINR looks set to range trade between

66.50 and 67.50 in the short term.

     --OUTPERFORMANCE VS ASIAN FX

     The rupee is now at the weakest it has been, both in real effective terms

and in spot terms, relative to the rest of Asian FX since the August 2013

crisis. Back then, India's terms of trade were considerably worse as oil prices

were much higher and the current account was hovering around 5% of GDP, compared

to less than 1% now. Furthermore, back then India's economic reform drive had

barely been conceived, let alone enacted upon.

     --REAL YIELD ADVANTAGE ATTRACTIVE

     While the INR is not particularly attractive relative to the USD given the

ongoing narrowing of real interest rate spreads with the U.S., it is highly

attractive on a relative basis. With 2-year bond yields having surged to

12-month highs of 7.3%, real yields (based on trailing CPI) are an impressive

300bps, which is among the highest in the region.

     This is supported by the continued build-up of foreign reserves at the

Reserve Bank of India, which suggest that the central bank not only has the

ability to defend the currency, but has been actively weakening it to boost

competitiveness. With the PMI reading showing new export orders rising for six

consecutive months, there is little pressure for the RBI to keep steering the

currency weaker. While MNI do not see a major bull market in the INR in spot

terms, the currency is highly likely to outperform in total return terms given

the sizable carry on offer.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,M$$FI$]