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Indian rupee expected to follow overall market trend after elections

DUBAI: When it comes to the electoral results and their impact, the performance of the rupee may be little different from that of the stock markets, particularly given the relevance of the overseas investor, having to translate funds.

A win in favour of Narendra Modi, the leader and prime ministerial candidate of the BJP-led opposition National Democratic Alliance (NDA), could drive the rupee to 2008 highs, according to Indian media reports in mid-March.

Opinion polls show a likely BJP-led coalition coming to power in the centre, ousting the current incumbent, the Congress-led UPA. Such an outcome could advance the rupee even to as high as Rs40 to Rs45 against the dollar from the current Rs61.50, said a Bloomberg report on March 18, quoting Citigroup’s head of Asia-Pacific currency and derivative sales, Adam Gilmour.

History has showed us that there have been two major instances where there has been significant movement in the rupee immediately following a general election–in 2009, following the re-election of the Congress party and in 1996 when there was a hung parliament, said Gaurav Kashyap, the Dubai-based head of Futures at Alpari Middle East, a global online currency and commodities brokerage.

“In 1996, in the one year leading up to the elections, the rupee weakened 19.8 per cent and recovered 8 per cent of those losses in a month following those elections. In 2009, the rupee depreciated 31 per cent in the year leading up to the elections and following the outcome, the pair recovered 10 per cent of its losses in the quarter following the election, and then another 5.5 per cent through June 2010.” Barring these two elections, the rupee generally tends to weaken [following an election], depreciating gradually over a longer course of time, according to Kashyap.

In the instance of Modi and the allied parties coming to power, analysts Gulf News spoke to pointed to further strengthening of the Indian currency from current levels.

“A BJP win would no doubt see the rupee rally towards the channel between [Rs] 50.50 and [Rs] 54 in 2014,” said Kashyap. The results of the 2014 elections will greatly impact both the long-term and short-term trend, he said.

However, immediately following this election he expects to see volatility, considering the current state of the Indian economy. “Once a roaring tiger, growth has waned, foreign direct investment (FDI) has slowed and the currency is recovering from one of its worst periods after it hit a record low in 2013,” Kashyap added. “Sentiment with regards to the status quo has never been weaker, and a much-needed change in the political scenario will no doubt be a boost to markets.” In the event of a Congress-backed formation, he expects to see the status quo maintained, keeping any potential gains in the Indian markets in check as investor confidence, both domestically and internationally, would remain weak.

Pradeep Unni, head of strategy and research at Richcomm Global Services, a Dubai-based brokerage, pointed out that currently (mid-March), rupee futures on the Dubai Gold and Commodities Exchange (DGCX) have fully priced in a clean sweep by one party and its allies, and stable government for the next five years.

He believes a swift spike to 58 or 57 per dollar can be expected if this situation becomes a reality. The rupee has already strengthened by more than 2.5 per cent to date (17th) in March update Anil Rego, chief executive of Bengaluru-based investment services firm Right Horizons, said the movement of the rupee would largely depend on fund flows. Specific issues could be factors in the rupee’s movement.

Gaurang Shah, vice-president at Geojit BNP Paribas, said if Modi were to win, much would depend on what stand the BJP takes on FDI in the multi-brand retail sector, to which it has been opposed until now. And if Modi and his cabinet opt to favour such FDI, it could result in the rupee strengthening. In the event of a third or federal front or the Aam Admi Party catapulting to lead the government in the centre, the rupee could head lower. “Technically, we cannot value the current strength of the rupee only on the back of elections and expectations of a Modi win,” said Unni. “The Indian economy has performed quite well over the past six to eight months. This is the impact of policy actions taken by the Reserve Bank of India and the government to arrest the slide of the rupee.”

Inflation and the current account deficit are issues to be kept in mind when evaluating the rupee. “In the coming months, if inflation cools and the current account deficit continue to decline upon lower gold imports, the rupee’s strength will only be augmented if a stable government comes to power,” added Unni. While agreeing that policy initiatives have aided the rupee’s recovery, Kashyap said a clear win by BJP and its allies would accelerate it.

“The efforts of the RBI have also played a large part in the recovery of Indian markets,” Kashyap said. “Some of the initiatives taken by governor Rajan have already started to reap rewards. Inflation is starting to wane, and these initiatives will continue to support the rupee in the future. “But ultimately, a majority BJP victory will be the key to [bringing in] a fresh bout of confidence [to] trigger a longer-term Indian recovery.”