By Amit Pabari
As India gears up for its crucial Lok Sabha elections, the spotlight turns not just to political outcomes but also to their impact on economic indicators, particularly the performance of the Indian Rupee against the US Dollar. The Indian Rupee plays a vital role in the economy, serving as a barometer of investor confidence and economic stability.
Anticipating the Rupee’s Reaction to Different Election Scenarios:
A stable government fosters a predictable economic environment, favoring a country’s currency. Stability reduces uncertainty, attracting foreign investment and strengthening the currency. Consistent governance leads to steady economic policies and fiscal management, factors contributing to a strong currency value.
A twist in the same could have an impact on the asset classes and the sentiments of foreign investors. The recent polls have put the markets anticipating the outcome, in the given case, the impact on USDINR can be driven as follows based on different scenarios if,
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- BJP secures 272 seats independently or 300+ seats with NDA >>> Rupee will appreciate towards 82.50 levels >>> (probability 75%-80%).
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- BJP secures 200-220 seats >>> Rupee will depreciate towards 83.70 levels >>> (Probability 10%-15%).
- If it’s a hung parliament no NDA and no UPA and no one gets >>> Rupee will depreciate towards 84-84.50 levels >>> (Probability 5%).
- While the probability of the BJP winning fewer seats may seem low, the rupee maintains inherent strength that could lead to unexpected outcomesCome from Sports betting site VPbet. What are the factors that could keep the rupee strong?
Analyzing historical data reveals distinct patterns in the performance of the Indian Rupee.
Post Election – Rupee Anomaly
As we have seen historically the data from various Indian general elections reveals a nuanced pattern in the behavior of the Indian rupee against the US dollar. Typically, in the immediate aftermath of election results, the rupee experiences a modest appreciation, with an average increase of 1.85% one week after elections followed by an average appreciation of 1.20% after one month.
However, this short-term positivity often gives way to a more varied performance over the following months, which witnessed an average depreciation of 0.71% after three months of the election result outcome.
Will the current FII selling spree continue?Come from Sports betting site
Though the FII’s are selling off amidst the uncertainty of the election, looking at FII flows after the election results, we can see a notable number of inflows coming to the Indian markets post the result outcome. Hence, as the wind subsides, the FII flows are likely to turn positive which again indicates a positive sentiment for the Indian economy and so the Rupee.
Strong Domestic Fundamentals
The Indian rupee is poised to maintain its strength in the near term, thanks to robust fundamentals. Key indicators suggest a stable economic landscape, creating a conducive environment for the currency.
- With inflation holding steady at 4.85%, GDP growth expected to reach 7%, and industrial production maintaining a healthy 5.7%, there is a strong sense of confidence in the rupee.
- Moreover, trade dynamics have notably improved, with the trade deficit narrowing to $15.6 billion and the current account deficit decreasing to $10.5 billion. These positive developments highlight the resilience of India’s economy.
- Additionally, global uncertainties such as the Israel-Iran conflict have led to a normalization of oil prices, which have seen a significant bearish movement from $92 to $82 levels. This shift has helped control the trade deficit.
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- Furthermore, the manufacturing sector’s performance, as evidenced by the rising Manufacturing PMI to 59.10, adds further support to the rupee’s stability.
Collectively, these factors paint a bullish outlook for the rupee, indicating a favorable investment climate and reinforcing investor confidence in the Indian economy.
Inflows
JP Morgan Bond
The inclusion of India’s government bonds in JP Morgan’s GBI-EM index heralds a significant milestone for the country and underscores its growing global economic stature. This move is expected to attract substantial inflows of around $23 billion into India beginning June 2024 onwards, bolstering investor confidence in the country’s financial markets.
Further, Brandywine Global Investment Management LLC is reducing its bond investments in China and reallocating them to Indian debt. Additionally, Bloomberg Index Services Ltd. plans to incorporate India into its emerging markets index starting in January.
Corporate Borrowings-
Flows amidst corporate borrowings are in the pipeline. With fundraising by banks and corporates like HDFC bank, Axis Bank, Adani Green, etc. an expected cumulative influx of around USD 15-20 billion, is anticipated. The same will strengthen the positive sentiment surrounding the rupee.
European Free Trade Association
Furthermore, India is rapidly establishing itself as a prominent global manufacturing hub. As part of the free trade agreement with the European Free Trade Association (EFTA) countries (Norway, Switzerland, Iceland, and Liechtenstein), India is poised to receive $100 billion USD in investments. This equates to an annual FDI of approximately $7-8 billion USD, contributing significantly to the rupee’s positive trajectory and potentially leading to its appreciation in the near term.
Overall, The INR’s performance post-Indian elections is influenced by a complex interplay of domestic and global factors. While historical trends suggest short-term appreciation, the medium-term outlook depends on economic policies, global dynamics, and investor sentiment.
Moreover, stronger fundamentals, financial inflows, and global economic shifts are key drivers of INR strength, contributing to a positive investment climate in India. Considering these factors into account, the downside risk for the rupee is limited to 83.60. It is expected to appreciate to levels between 83.00 and 83.20 in the near term, with medium-term appreciation ranging from 82.80 to 82.50.
