Rupee’s journey in the last 12 months has been nothing short of a roller-coaster ride. From being Asia’s best-performing currency, it dipped steeply to its worst last quarter; however, over the last five weeks, it’s back at the top and reigning over its regional peers.
On March 18, the currency closed at a seven-month high of 68.53 to the US dollar, taking its net gain this calendar year to 1.8%, compared to a depreciation of 8.46% in 2018.
A weakness in the US currency and optimism that Prime Minister Narendra Modi’s BJP will win a second term in this year’s general election are reportedly the key drivers of this boost. The fact that crude oil also has remained largely stable is helping the rupee inch up.
Most analysts are now expecting the rupee to stabilise around 68.70 to 68.40 in the short term, in the best-case scenario.
A doleful journey ends
The free fall started after a series of market meltdowns since last September, when the rupee slid to its worst forex rate of 73 per dollar, owing primarily to the US-Chinese tariff war and rising crude oil prices, to put it derivatively.
The inflation in oil prices also affected India, which imports 80% of its oil and pays for it in US dollars; the dollar gaining strength eroded rupee further.
The trade war only added to this chaos. The currency slumped more after December-end, missing the rally on Brexit hopes and optimism over US-China trade talks, compared to other Asian currencies.
After being on the boil at the beginning of the new year, it picked up. However, following the Pulwama terror attack, it slid back down in mid-February to 71.515 per dollar, from a strong 69.23 in early January. The reasons cited were tensions with Pakistan over Kashmir and political uncertainty in view of the 2019 elections that weighed on trade sentiment.
Losses in Indian assets deepened for a while since then, clouding the future and portending a return to the September blues, in case negative factors sustained till March.
Is it a get-set-go from here?
The optimism is believed to have led robust foreign inflows—as dollars gushed into local shares, equities, and debt—that took the carry-trade returns on the rupee to the highest in the world over the last month; a carry trade involves buying a currency and “carrying” it until you make a profit.
In terms of profit-booking (selling a stock that has increased in value) too, the rupee posted its first drop in seven sessions on Tuesday. According to The Hindu, the right to sell the rupee now cost 19 basis points more than those to buy, compared to its highest-in-two-years 148 bpi on September 5, 2018.
State of play for the rupee
Besides the domestically increased confidence in BJP’s prospects and a recovery in portfolio flows, the Federal Reserve and the European Central Bank have turned more supportive.
A falling US dollar is another reason for the rupee’s upward rally; between 2002 and 2018, the dollar has declined 6%, according to the US Dollar Index.
The Reserve Bank of India, in its latest monetary policy review, slashed the benchmark interest rate by 25 basis points, changing its stance to “neutral” from “calibrated tightening”. With the central bank adopting a dovish approach to inflation and faltering global expansion as well, more foreign investors have been prompted to chase higher yields in the emerging Asian market.
The fact that foreigners bought a net $3.3 billion of shares through March 18, accounting for more than half the $5.6 billion of inflows year-to-date, and raised holdings of bonds by $1.4 billion this month reiterated it.
Data compiled by Bloomberg also shows that borrowing in dollars, to purchase rupee assets, has earned 3.8% over the last month—the best carry-trade return in the world.
Modi and money
Analysts have no other way of explaining this improvement in rupee’s performance other than the fact that the market is cashing in on a Modi victory.
“We believe that the rupee has, in the short-term, become a barometer of the Indian elections,” Singapore bank DBS said in a note on Wednesday.
Other experts have claimed that the high-yielding currency will likely continue further if Modi wins a second term, although Quartz argues that markets will be choppy until the polls at least. CNBC also reports that this “relief rally” is unlikely to last.
Some have even predicted that the currency may rally to 67% by June-end and that a BJP-led coalition victory bodes well for the INR for the rest of the year.
Investment sector has had a huge bump under the NDA, so it’s not difficult to correlate the expectant return of the government with renewed faith in the market. Conversely, rupee’s performance propitiates the national party’s “economy first” agenda and serves to appease its core voting demographic: the urban trade and commerce sector.
Besides Centre’s trickle-down approach to boosting investment, favourable but volatile external conditions have also played decisive roles in bringing this about. Meanwhile, the Opposition is fighting on the plank of an inward-looking economic reform for the rural labour sector, the poor, and the unemployed, via the minimum income scheme.
Two opinion polls have already showed that Modi’s ruling coalition may get close to the 272 seats needed to win a majority in elections that begin on April 11. Results are on May 23.
Prarthana Mitra is a Staff Writer at Qrius
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