Goldman Sachs prefers using the euro as to fund its carry trade of the rupee, Bloomberg reported, adding that the rupee remains a favorite among carry traders, with Goldman Sachs citing the attractive carry-to-volume as a key reason.

The logo for Goldman Sachs is seen on the trading floor at the New York Stock Exchange (NYSE) in New York City. (Reuters)

What is a carry trade?

A carry trade is when a foreign exchange trader borrows money in a currency from a country with a low-interest rate, converts the borrowed amount into another currency from a higher interest rate country, and invests the money into a security paying the higher rate, making a profit in the process.

Why does Goldman Sachs favour the Euro to carry trade the Rupee?

This is also because the bank is betting that the European Central Bank will further reduce interest rates.

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The euro declined more than 3% this year against the dollar as the European Central Bank started cutting interest rates in June, with Governing Council member Olli Rehn saying investor expectations to loosen monetary policy twice more this year are fair, Bloomberg wrote.

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In contrast, the RBI signaled its focus on controlling inflation.

Why is the Rupee attractive for foreign investors?

The RBI’s repeated interventions on the value of the Rupee, aided by its over $650 billion of foreign-exchange reserves has made the rupee one of the most stable currencies in the world. The rupee remains a favorite for foreign reserves with Goldman Sachs due to the attractive carry-to-volume as a key reason.

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Investors expect economic stability to be maintained in Prime Minister Narendra Modi’s new term and thus, the favourable view of the rupee remains the same, Bloomberg wrote.