Sara Yates, global currency strategist at JP Morgan Private Bank, has given five reasons why the Indian rupee, which has returned to the firm’s one year target of 55, is a favourite carry currency with the bank.

First, with a policy rate of 7.25 per cent, the currency provides great carry, Yates said. Second, inflation is low and she predicts it will be “less of a drag” on the Indian rupee in the future. In the past, the currency has under-perfomed due to high inflation boosting real rate and has therefore faced substantial depreciation pressures. However, as the wholesale price index is close to the bottom of the central bank’s tolerance band and consumer price inflation remains elevated, it typically follows WPI inflation over time.

Thirdly, thanks to last year’s structural reforms, India is moving in the right direction, said Yates. The firm shares the same view as the World Bank, whose senior country economist said “India needs to continue making progress on its domestic reforms agenda,” so not only will this agenda help the country realise its long-term growth potential by supporting inward investments and portfolio flows, but the agenda is also likely to reduce market concerns and the currency’s risk premium, said Yates.

India’s fixed income market is gradually opening up too, she said, widening the possibility for rate cuts to be a currency positive.

Her fourth reason is therefore capital account liberalisation. Bond prices and interest rates move in opposite directions and the expectation of future rate cuts has already helped support a $6 billion inflow into India’s equity and fixed income market this month. This inflow helps offset the outflow from those who find the falling carry less attractive, said Yates. The firm expects further liberalisation, with the government planning to start issuing index linked bonds in June.

Lastly, diversification is the fifth reason for its appeal, said Yates. India has a large current account deficit, which is a concern for the market and a weight on the currency. But research by Barclays has found that recent moves in the oil and gold price could reduce the current account deficit by 1 per cent of GDP, signalling a significant improvement.