The Reserve Bank of India's hawkish stance alongside the rate hike this week has lifted near-maturity yields to the highest level in more than four years. The cut-off yield at Wednesday's Treasury bill auction rose to 7.06%, the highest since Dec. 2018. Following RBI's policy decision, analysts are now pencilling in one more rate hike in April. "Prospects for further rate hikes would support (debt) flows for front-end carry while the RBI's determination to bring inflation lower would support the medium-term macro stability," BofA Securities said in a note. India has attracted over $800 million in debt inflows thus far into the year, while equities recorded a net outflow of over $4 billion. In the December quarter, foreign investors took out about $400 million from India's debt market.
"INR carry appears attractive relative to other markets in
the region. We see scope for INR to benefit..," BofA said.
Taking the USD/INR example, the rupee has a carry of 216
basis points in terms of the 364-day India Treasury bill yield
and 1-year U.S. Treasury yield.
Compared to this, the carry on another Asian currency
considered a high yielder, the Indonesian rupiah, is about 110
bps. The Philippine peso has a carry of 44 bps.
LOWER VOLATILITY
For carry flows, volatility is an important metric that investors consider apart from interest rate differentials. The level of volatility of the high-yielding currency impacts the returns on the carry trade. When the volatility is high, carry traders are exposed to more risks. The RBI Governor Shaktikanta Das, in his policy speech this week, pointed out that the rupee was one of the least volatile currencies among its Asian peers in 2022 and that it continues to be so this year.
"INR is sporting an attractive real yield and volatility remains low. That is attractive for carry traders," said Anindya Banerjee, head of research for forex and interest rates at Kotak Securities. A ranking based on real yields and volatility shows that the rupee is among the top emerging market currencies for carry trades, he added.
The 1-year at-the-money volatility for USD/INR is at around 6%, while for the rupiah it is at 8.5%. For other EM currencies, like the South African rand and the Brazilian real which while having higher yields, it is more than 15%. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Foreign debt flows month-wise (in million) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)
