Indian rupee in the middle of the EM pack - BBH

Analysts at Brown Brothers Harriman explained that the Indian rupee continues to perform in the middle of the EM pack.  

Key Quotes:

"In 2016, INR fell -2% vs. USD and was in the middle of the EM pack.  Best performers last year were BRL (+22%), RUB (+20%), and ZAR (+13%), while the worst were ARS (-18%), TRY (-17%), and MXN (-16%).  So far in 2017, INR is up 5% YTD and is still near the middle of the EM pack.  Our EM FX model shows the rupee to have STRONG fundamentals, so this year’s “so so” performance is a bit disappointing.

USD/INR has traded in a narrow 64-65 since the end of Q1.  The low near 64 recorded in late April was the lowest since August 2015.  A clean break below 64 would suggest a test of the January 2015 low near 61.30.  Retracement objectives from the 2014-2016 rise come in near 63.60 (50%) and 62.36 (62%).

Indian equities continue to underperform.  In 2016, MSCI India was -1% vs. +7% for MSCI EM.  So far this year, MSCI India is up 16% YTD and compares to 17% YTD for MSCI EM.  This underperformance should intensify, as our EM Equity model has India at a VERY UNDERWEIGHT position.  

Indian bonds have underperformed recently.  The yield on 10-year local currency government bonds is +15 bp YTD.  This is ahead of only the worst performers China (+62 bp), Czech Republic (+37 bp), Romania (+20 bp), and Korea (+16 bp).  With inflation likely to remain subdued and the central bank perhaps tilting less hawkish for a period, we think Indian bonds will start to outperform more.  

Our own sovereign ratings model has India’s implied rating at BBB/Baa2/BBB.  Several quarters ago, India was facing downgrade risks to its BBB-/Baa3/BBB- ratings.  Now, we are seeing some modest upgrade potential."