Rupee Surges To Above 66/$ On State Election Verdict
Rupee surges to trade at its highest levels since April 2016
Positive sentiment following the verdict of state elections along with lower oil prices pushed the Indian rupee to a sixteen-month high on Tuesday. The gains in the currency match those in the equity markets where the benchmark Nifty surged to a record high.
The rupee opened strong and continued to gain through the trading session. It closed at 65.81 against the U.S. dollar, compared to its previous close of 66.60. At current levels, the rupee is at its strongest since November 2015. It is also the third best performing currency in Asia since the start of this year, according to data from Bloomberg.
While the rupee has had a strengthening bias over the past month, the surge on Tuesday was driven by the outcome of state elections announced over the weekend. The victory of the Bharatiya Janata Party (BJP) in the key state of Uttar Pradesh would embolden the government to continue with tough economic measures, said commentators after the verdict.
The strong performance of BJP in the crucial state of Uttar Pradesh (and Uttarakhand) despite weaker performances in the states of Goa and Punjab in the recent state elections may (1) intensify the government’s economic reform efforts, (2) accelerate economic progress of the large state of UP and (3) strengthen the government’s resolve to address key pending issues such as non performing loans, power.Kotak Institutional Equities (March 14)
In addition, lower oil prices are favorable for the rupee as it helps keep India’s import bill in check. Oil prices have fallen to near $48 per barrel and are trading at their lowest levels in three months.
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Foreign institutional inflows into Indian debt and equity markets have also rebounded and are supporting a stronger rupee. So far in March, foreign investors have bought a net of $1.5 billion in Indian debt and equity. Debt flows, in particular, have rebounded after selling seen in the immediate aftermath of the government’s decision to demonetise announced in November 2016. Since then, fears of a sharp slowdown in the economy have abated and foreign investors have returned.
At a broader level, the currency has strengthened today and that is reflecting a stronger mandate for the government towards reforms, R Sivakumar, head of fixed income at Axis Mutual Fund told BloombergQuint. Sivakumar, however, pointed out that the strengthening of the currency should be seen in the context of its strong performance over the past year.
The Indian rupee has remained stable despite concerns that it is getting overvalued. The 36-country trade weighted real effective exchange rate (REER) index is above 116, based on the RBI’s latest monthly bulletin, suggesting that the currency is overvalued.
This, together with the likely strength in the Dollar due to higher interest rates in the US could keep rupee strength in check.
The rupee will likely follow emerging market (EM) currencies and weaken in FY18 on possible realignment of global risk appetite, said Kotak Institutional Equities in its report on Tuesday.
“However India’s relatively lower dependence on external trade, change in RBI’s stance, and relatively strong policy and macro fundamentals, should lead the rupee to fare better than most of the EM currency basket,” the report added.
Arvind Narayan, head of treasury at DBS Bank also expects the rupee to weaken over the course of year. Narayan expects the Indian currency to hit 71 against the U.S. dollar by the end of 2017, he told BloombergQuint in a phone interview.
