In a matter of 5 months, India's currency has become the best performing currency across the world. The optimism of Prime Minister Narendra Modi continuing for a second term amid the recent tension between India and Pakistan has ensured that the carry-trade returns on the Indian rupee are at their highest.
New Delhi: In a matter of 5 months, India's currency has become the best performing currency across the world.
The optimism of Prime Minister Narendra Modi continuing for a second term amid the recent tension between India and Pakistan has
ensured that the carry-trade returns on the Indian rupee are at their highest. There have also been increased local shares and debts.
Gao Xi, currency strategist with Scotiabank in Singapore has said that the rupee could advance further if Modi wins for a second time in India.
Xi also expects that this year could see the rupee performing at 67 per dollar.
With the increasing number of developing countries in Asia rallying up to global expansion, foreign investment would be directed
at countries with high yielding currency.
Several important factors have contributed to the increased stability of India's currency market, some of which are as follows:
1. Inward surge of dollars
A total of $3.3 Billion has been brought into the economy as foreign shares, $1.4 Billion has been invested in bonds and $5.6 Billion
has accounted for more than half the inflows witnessed to date. The rupee has seen an all time high in August 2018 and recently fell after seven
sessions.
2. Carry-trade returns
Data collected by Bloomberg show that over the past months dollars converted to rupee to purchase assets has resulted in 3.8% in returns over the
last month alone. Opinion polls conducted show that the Modi coalition government might win 272 seats in the upcoming election the results of
which are due on May 23.
Anindya Banerjee, an analyst at Kotak Securities Ltd. in Mumbai said "The market is pricing in a Modi victory as there are no other factors that explain the sudden change of mood.
On top of that, carry traders are eager to be long rupee and short other low-yielding currencies, including the dollar. It is a get-set-go for the rupee".
3.Option costs
In the derivatives market, the one month option to sell the rupee is now at 19 basis points more than to buy the same.
Dushyant Padmanabhan, a currency strategist at Nomura Holdings Inc. in Singapore has said " Global conditions -- dovish Fed and ECB -- have turned more supportive and domestically,
increased confidence in the BJP’s prospects and a recovery in portfolio flows have been the key driver".
4. Swings in the currency
Unexpected swings and volatility in the currency over the last three months has led to a situation of price options falling to 5.87%
on Friday, the lowest since August 2018.
Barclays Plc strategist Ashish Agrawal in a note has written " We expect the rupee to remain resilient in the near term, as bunched up foreign inflows
limit any pressure from weakening Emerging Market Forex (EMFX) sentiment. A potential BJP-led coalition victory would bode well
for the INR for the rest of this year".
Last Updated Mar 20, 2019, 1:53 PM IST