As India enters a major bond index, Citi views the rupee as a favorite in Asia

Dollar

Nathan Venkat Swami, head of foreign exchange trading in Asia Pacific, said that the currency's good fundamentals, a shrinking current account deficit, and increased expectations on inflows surrounding India's admission into a global bond index are contributing to its attractiveness.

Citigroup Inc. is still optimistic about the Indian rupee and believes that this year will see it continue to outperform other currencies in the region.

Nathan Venkat Swami, head of foreign exchange trading in Asia Pacific, said that the currency's good fundamentals, a shrinking current account deficit, and increased expectations on inflows surrounding India's admission into a global bond index are contributing to its attractiveness.

Due to foreign investors purchasing Indian bonds prior to the nation's inclusion in JPMorgan Chase & Co.'s main index, the rupee is the only developing Asian currency that has appreciated against the dollar this year. According to Citi's opinions, its allure is not going away.

"The carry and volatility dynamics of the rupee have made it a preferred currency among global investors in most Asian long-short relative value baskets," according to Swami. "With extremely small intraday fluctuations and suppressed realized volatility in 2024, the currency has been extremely stable."

Over the last several months, Swami added, the dollar/rupee's one-week and one-month realized volatility has been tracking within the 1 to 1.25 vol band, while the implied curve has been sitting at multiyear lows.

If unexpected results emerge from the national elections, in which Prime Minister Narendra Modi is running for a third term, the rupee is at serious danger.

Beyond the election results, there was modest buying demand for at-the-money strikes in the one-month tenor, although Swami noted that this was mostly due to the appealing break-evens given the low base volatility.

According to him, the rupee would likely be influenced by a number of variables in the near future, such as changes in US and global policy rates and relative movements versus Asian EM currencies.