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Bloomberg
The rupee rose to a two-month high as foreign investors piled into Indian assets and Goldman Sachs Group Inc. said the government’s crackdown on unaccounted wealth will boost the nation’s bonds and currency.
In India’s most extensive anti-graft operation in almost four decades, Prime Minister Narendra Modi late Tuesday decided to ban 500 rupee ($7.50) and 1,000 rupee notes. The currency reform will increase banking-system liquidity, and the rupee and local notes will likely outperform Asian peers in the near term, Goldman Sachs analysts led by Timothy Moe wrote in a report on Wednesday.
“We see this as positive for the bond market because of the increase in banking system liquidity, eventual positive effects on the tax base and government revenue, and likely short-term disinflationary effects on spending from cash constraints,†the analysts wrote.
“The rupee may face some volatility near term, but over the medium term, we expect the current account to improve on reduced imports.†The rupee advanced for a third day, climbing to 66.3375 per dollar, the strongest level since Sept. 7, prices from local banks compiled by Bloomberg show. The currency was up 0.1 percent at 66.3975 as of 11:03 a.m. in Mumbai.
Overseas holdings of Indian government and corporate bonds increased for a seventh day on Wednesday, taking inflows this month to almost 53 billion rupees. Foreign investors have bought a net $55.2 million of local shares so far in November.
The yield on sovereign notes due Sept. 2026, which sank 13 basis points on Wednesday, dropped another two basis points to 6.64 percent, according to prices from the Reserve Bank of India’s trading system. A close at that level will be the lowest for a benchmark 10-year security since June 2009.
Modi’s step is an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, locally known as black money.
Mumbai-based brokerage Edelweiss Securities Ltd. predicts the government’s surprise crack down on high-value currency notes will uncover 3 trillion rupees in such funds. ICICI Securities Primary Dealership Ltd. is even more optimistic, pegging the figure at as much as 4.6 trillion rupees.