India’s rupee hits 11-month high on Modi mandate

Currencies Direct May 23rd 2014 - 2 minute read

India’s rupee hit a fresh 11-month high and was heading for its
fourth weekly advance on Friday (May 23rd) after the most
decisive election result for 30 years boosted investor
confidence.

The rupee rose as high as 58.3650 against the dollar, a level
not seen since last June. The rupee had plunged to a record low
versus the greenback after the Federal Reserve first hinted last
year at scaling back stimulus, which shocked markets and dented
risk appetite.

But steady gains in Asian markets and a resurgence in demand for
riskier assets has seen the rupee claw back the ground lost to the
greenback.

The clearest difference for the Indian currency has been the
decisive victory for Narendra Modi in the recent general
election. His Bharatiya Janata Party (BJP) swept to power
in a landslide win, the largest at an Indian election since
1984.

Craig Botham, emerging markets economist at Schroders, says the
elections have handed the new prime minister a strong mandate.

“There had been a risk that the election results would
disappoint and that the optimism of recent months would sour,” he
explains. “Instead, the count has surprised to the upside, giving
investors a fresh injection of hope.”

However, Mr Botham stresses that there is a lot work for the new
government.

“There is an investment bottleneck to clear, fiscal
consolidation will be important, and central bank governor Raghuram
Rajan is keen to move to inflation targeting,” he says. “Over the
longer term, inefficiencies in the land and labour markets must be
addressed, and the tricky issue of foreign investment
resolved.”

The scale of the victory for Modi is why many are hopeful. “A
majority for the BJP greatly reduces the need for compromise and
could mean that we see reforms pushed through relatively quickly,”
says Mr Botham.

Some have predicted a 35 per cent surge in the rupee after the
BJP’s victory, which would see USD/INR tumble to around 40, a level
not seen since 2008. Ajay Argal an investment manager at Baring
Asset Management in Hong Kong, says “the [Indian] economy and
financial markets will benefit from an economic upturn over the
next 18 to 24 months”. He adds: “We are encouraged by the election
result and believe that it supports India’s economic growth
story.”

It wasn’t all good news for
emerging market currencies
this week, however. Brazil’s real
weakened almost 0.5 per cent against the dollar as the nation’s
central bank president, Alexandre Tombini, hinted that a scheme to
support the currency could be withdrawn. The real dipped even more
than the Thai baht, which fell as Thailand’s army seized power in a
coup two days after declaring martial law. China’s yuan was also
lower and set for a second straight weekly decline on bets
policymakers will allow the
exchange rate
to slide to support exports.

Emerging market currencies were supported after positive Chinese
factory data this week. Figures showed China’s manufacturing
activity was at its highest in five months in May, boosting
investor confidence amid fears of a slowdown in the world’s second
largest economy, a key purchaser of many emerging market nation
exports.

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