Rupee will remain Asia's winner currency in 2017

Dubai - The RBI could cut its repo rate at least twice in the next twelve months

My conviction that the Indian rupee would outperform emerging market currencies was vindicated in 2017. The Indian rupee is up 6 per cent against the US dollar, making it Asia's best performing currency. My bullish case for the Indian rupee was based on the highest real (inflation adjusted) interest rates in South/Southeast Asia after Indonesia, coupled with the reformist BJP government whose win in the UP state election has slashed political risk while 7 per cent GDP growth is the highest among the world's major emerging markets.
The Reserve Bank of India (RBI) could cut its repo rate at least twice in the next twelve months. This will attract fresh inflows into Indian government debt (G-Secs) and equities on Dalal Street. Foreign holdings of Indian G-Secs and corporate debt have risk by $22 billion in 2017, the main reason for the Indian rupee's stellar outperformance. Russian sanctions and Brazil's successive political scandals (Lavo Jato, Temer) have made the Indian rupee the ideal high yield carry trade currency for Planet Forex. India offers foreign bond holders a higher risk free return, a stronger rupee, reform momentum, economic growth and relative political stability. In such a macro milieu, RBI rate cuts will mean a stronger rupee against the US dollar. It will not surprise me to see the Indian rupee rise to 61 by year end 2017 as the lack of US wage inflation means no imperative for aggressive Federal Reserve rate hikes.
The macro risks for the Indian rupee could rise in 2018.
One, Indian equities now trade at stratospheric valuations, raising the risk of a sharp correction and foreign outflows from Dalal Street.

Two, global debt funds have almost exhausted their purchase limits for Indian government debt. If the Modi government does not relax these foreign limits, inflows into the Indian debt market could decelerate and trigger short term hits on the rupee.
Three, the Federal Reserve's balance sheet shrinkage (quantitative tightening?) could reverse the "soft dollar" theme of the first seven months of 2017. If the dethroned King Dollar resumes its uptrend, emerging markets currencies would be pressured lower and the Indian rupee will be no exception.
Four, there is evidence of dissent in the RBI's monetary policy committee, as the 5-1 vote at the last repo rate conclave undermines the political position of Governor Dr Urjit Patel.
Trump's "fire and fury" comment and North Korea's threat to launch a missile attack on Guam has escalated geopolitical risk and led to a predictable rise in the value of safe haven assets. The Japanese yen has surged to 109, paradoxical since the Empire of the Rising Sun is within range of Comrade Kim's nukes. The Swiss franc's rise has been less dramatic at 0.96 and gold trades at $1,289. While the risk of miscalculation can never be discounted in international relations - the Great Powers sleepwalked into a horrific world war in August 1914. I doubt Washington will launch a nuclear strike against North Korea or vice versa.
Yet geopolitical risk and a US stock market trading at 19 times earnings means gold prices could resume their uptrend since Pyongyang will not back down. I expect the South Korean won to continue to depreciate against the US dollar, possibly down to 1180. Foreign investors are dumping South Korean shares after a spectacular rally in the Kospi in 2017.
Soft French industrial output data reinforces public hostility to Macron's reform agenda. The euro has already fallen from 1.19 to 1.17. The world currency markets will also focus on the German political risk in September. The awful UK trade data will also pressure sterling to its week lows at 1.2950. Despite the Opec meeting in Abu Dhabi, the Canadian dollar has been hammered down to 1.27. This leads me to believe the US Dollar Index can well rise to 95 even though the risk of the North Korean crisis means the Federal Reserve does not move at the September FOMC. Inflation is muted as both the weak PPI and CPI data last week demonstrate. There is no "fire and fury" in the Yellen Fed.

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