Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Rupee Clears One Obstacle Only to Face Another in State Polls

(Bloomberg) -- India’s rupee has overcome one hurdle after the central bank and the government signaled a temporary truce over reserves. It’s now gearing for another obstacle in the form of state elections.

Political uncertainty is emerging as the key risk as Prime Minister Narendra Modi is seen facing a tough electoral battle in some major states ahead of the national vote in 2019. The rupee rose Tuesday, after the Reserve Bank of India agreed to form a panel to study a government demand for a part of its capital, ending a brawl that’s dented investor confidence.

Rupee Clears One Obstacle Only to Face Another in State Polls

“Political jitters amid state elections will be the key headwind for further rupee appreciation, while the economic factors aside from inflation haven’t been rupee friendly,” said Prakash Sakpal, economist at ING Groep NV in Singapore.

Tuesday marks a sixth day of gains for the rupee, putting it on course for the longest winning run in 13 months. The rally has also been helped by the recent decline in oil prices. The currency climbed as much as 0.5 percent to 71.2825 per dollar, its strongest level since Sept. 4.

The optimism may prove to be short-lived, with Modi’s Bharatiya Janata Party seen losing to the main opposition Congress in the state of Rajasthan, according to Bloomberg Quint. The two parties are neck and neck in Madhya Pradesh and Chhattisgarh -- both of which are currently ruled by the BJP.

Ballot-counting is due on Dec. 11 and the results may well determine how Asia’s worst-performing currency ends 2018.

©2018 Bloomberg L.P.