India's external investment deficit a hurdle for rupee as Asia rides weak dollar's coattails

Yahoo

18 hours ago

By Jaspreet Kalra and Nimesh Vora
MUMBAI (Reuters) -The rupee is likely to lag most of its Asian peers in a softer dollar environment, analysts say, with the Indian currency weighed down by an imbalance between what the country owes and owns abroad.
While currencies such as the Singapore dollar, Korean won and Taiwan dollar have surged 6% to 9.5% this year, the rupee is nearly flat.
Analysts at Barclays, Jefferies, and ANZ attribute the divergence to differences in the net international investment positions (NIIP) with Asian economies.
NIIP is the gap between what a country owns overseas and what it owes to the rest of the world.
As of December 2024, India had a negative NIIP, owing about $350 billion more to the world than it owned in foreign assets. In contrast, most other Asian countries hold a positive NIIP, meaning their ownership of foreign assets exceeds their external liabilities.
Unlike Taiwan, South Korea, China and Hong Kong, the absence of a positive NIIP for India implies underperformance of the rupee, said Mitul Kotecha, head of FX and EM macro strategy, Asia, at Barclays.
A positive NIIP usually stems from consistent trade surpluses, with excess earnings often invested in U.S. assets.
When the dollar softens, the value of those assets drops. To protect against that, investors hedge by selling dollars and buying their own currencies, which tends to boost the local units.
According to Barclays, Singapore, Taiwan and China and Korea hold the most liquid net international assets in Asia, while India and Indonesia hold the least.
India's international investment position implies that the rupee "may lag the rest of Asia," said Brad Bechtel, head of global FX at Jefferies.
"It's not like a very negative story. It's just more of a lagging story," Bechtel said.
The NIIP positions of Asian countries have come into focus amid investors seeking safety due to a persistently weaker dollar. Analysts and option markets concur that the dollar hasn't likely bottomed yet.
Minutes of the Federal Reserve's May meeting cited a rise in hedging demand as one of the factors contributing to the dollar's decline.
International investment surpluses in many Asian markets could boost their respective currencies, per analysts at BMI, a Fitch group company.
"This would come as overseas capital is repatriated or as firms move to hedge previously unhedged FX exposure," the firm said in a recent note, pointing to the sharp appreciation in the Taiwanese dollar as an example.