The Clearest Sign of India’s Very Good Year

India has had a very good year.

The country’s economy is booming, its stock market is near an all-time high and its population is on track to overtake China’s to become the largest in the world. India and the U.S. have signed deals this year on jet-fighter engines and semiconductor chips. In September, New Delhi hosted a summit of the Group of 20 nations.

The clearest sign that things are going well? A stable currency. After losing more than 10% against the dollar last year, making it one of the worst-performing large currencies in the world, the rupee has been remarkably resilient in 2023.

It has lost less than 1% of its value against the dollar this year, compared with a decline of more than 3% for the Chinese yuan, a roughly 9% fall in the South African rand and an 11% slide in the Japanese yen. One dollar currently buys around 83 rupees.

Solid management by the Reserve Bank of India, the country’s central bank, deserves much of the credit. The central bank spent decades building up the country’s foreign-exchange reserves to more than $600 billion by the first half of 2022, one the largest pools of central-bank reserves in the world.

The central bank intervened last year to defend the currency, causing reserves to fall by more than $70 billion. After once more boosting its reserves throughout most of this year, it started selling again over the past few months, depleting its reserves by almost $20 billion between the end of July and late October.

But intervention doesn’t work that well if other things aren’t going right. Just ask Japan, which intervened in the currency market in September last year to prop up the yen as it approached 146 to the dollar—a level that didn’t even hold for a month. (The yen recently traded weaker than 150 a dollar, nearing its lowest level in 33 years.)

India’s central bank has had a lot of help. The economy is on track to grow more than 6% this year, bringing its gross domestic product close to $4 trillion—within reach of Germany’s, the world’s fourth-largest. The International Monetary Fund says India’s economy will be one of the fastest-growing in the world over the next few years.

“When the world has a depreciating view of your currency, it is very difficult to support it,” said Jayesh Mehta, head of India fixed income, currencies and commodities at Bank of America. “But when the world has a mixed view, it is a lot easier for central banks to manage.”

India’s economy is benefiting from reforms put in place by the government of Prime Minister Narendra Modi, said Kenneth Akintewe, head of Asian sovereign debt at Abrdn, an asset manager. They include easier rules for foreign investors, simplified tax laws and stronger bankruptcy rules, he said.

There are still a number of entrenched problems—including excessive red tape, not enough women in the workplace and a tough-to-reform farming sector that contributes to food-price inflation—but global sentiment is optimistic.

“When I arrived in Asia in the early 2000s, it was hard to convince people to even begin thinking about investing in India,” Akintewe said. “The fundamentals were pretty bad. It’s a testament to how far the economy has come.”

The rapid rise in U.S. interest rates is one of the main reasons many currencies have lost value this year. The strength of the country’s economy means the Reserve Bank of India hasn’t been under pressure to cut interest rates.

India’s benchmark rate is 6.5% and its 10-year government bond yields are even higher, so there is still an argument for investors to keep their money in Indian assets even though U.S. government bonds are offering their highest returns in years. The Reserve Bank of India’s main tool is the repo rate, the level at which it lends money to commercial banks.

A popular trade is to borrow Japanese yen and buy Indian rupees, said Wei Li, a portfolio manager at BNP Paribas Asset Management. The rupee has strengthened by around 12% against the yen this year.

Foreign portfolio managers have also made big bets on India’s stock market, investing a net $12.3 billion into India this year through mid-November.

The MSCI India index, which tracks around 85% of the country’s listed stocks, is up more than 8% this year. Foreign investors can bet on the index through exchange-traded funds such as the iShares MSCI India ETF, which has more than $6 billion of assets under management.

Foreign demand for Indian stocks has been helped by a growing desire among some investors to reduce exposure to China.

It isn’t all good news. Some investors have recently pulled out of the stock market, which trades at more expensive price-to-earnings multiples than many other emerging markets. Foreign direct investment in the country has also been relatively weak this year.

The rupee has also been one of the few currencies not to benefit from a recent weakening of the dollar. Investors are betting that the Federal Reserve is finally ready to draw the curtain on its cycle of interest rate increases, and 10-year Treasury yields have fallen sharply over the last month. The Japanese yen, the Chinese yuan and the South African rand have all gained ground against the dollar over that period, while the rupee has barely moved.But there are more positives on the horizon. Indian government bonds are set to be added to some of JPMorgan’s indexes, meaning investors who track the indexes will need to hold more of them. Analysts expect the change to lead to as much as $30 billion of additional foreign investment into India’s bond market.

Write to Matthew Thomas at [email protected]