Goldman Uses Euros to Fund Its Favorite Carry Trade: the Rupee

(Bloomberg) -- Goldman Sachs Group Inc. is using the euro as the preferred currency to fund its long rupee carry trade on bets the European Central Bank will further reduce interest rates.

The Wall Street bank is “most constructive” on the rupee among the Asian EM high yielders, Danny Suwanapruti, head of Asia emerging markets for FX and rates strategy, said in an interview.

The euro has declined more than 3% this year against the dollar as the European Central Bank started cutting interest rates in June, and Governing Council member Olli Rehn said investor expectations to loosen monetary policy twice more this year are fair. In contrast, the Reserve Bank of India has signaled its steadfast focus on controlling inflation.

Euro Has Slid Against Dollar While Rupee Remains Resilient

The rupee remains a favorite in the region with Goldman Sachs citing the attractive carry-to-volume as a key reason. The central bank’s repeated interventions, aided by $650 billion of foreign-exchange reserves, have made the rupee one of the most stable currencies in the world.

“We expect the RBI to maintain its preference for currency stability, which should keep USD/INR in a relatively tight range, including limiting upside risks to USD/INR,” he said.

READ: How India’s Rupee Went From Most to Least Volatile: QuickTake

The less-than-expected mandate for Prime Minister Narendra Modi’s party in recent elections is unlikely to dampen the sentiment in the near term, Suwanapruti said.

“We expect macro stability to be maintained in Prime Minister Modi’s new term and it does not change our constructive view on the rupee.”

Goldman is also bullish on Indian bonds with a recommendation to buy the two-year paper. “The curve is very flat, and therefore, there is not much yield pick-up to go further out the curve. Hence, we like the front end,” he added.

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