Political uncertainty takes toll on Re value

Political uncertainty takes toll on Re value

On January 22, 2018, the rupee closed at 71.44 against US dollar, as against 69.70 a dollar on December 20, 2018.

The Indian rupee, which had shown a recovery towards the end of last year, is once again depreciating against the US dollar owing to a combination of factors. 

Over the last month, the rupee has lost 2.5% in its value as foreign funds have started pulling out of Indian markets and soaring crude oil prices amidst uncertainty over the formation of next government at the Centre. The currency had depreciated about 9% between August and October last year.

On January 22, 2018, the rupee closed at 71.44 against US dollar, as against 69.70 a dollar on December 20, 2018.

At the Interbank Foreign Exchange (forex) market, the rupee opened higher 5 paise at 71.23 on Tuesday on fresh selling of the American currency by exporters and banks.

However, it pared the gains of the early morning trade and finally ended at 71.44 per dollar, down by 16 paise against its previous close of 71.28 on Monday.

Analysts attribute the fall in the rupee to the continued outflow of foreign funds from the Indian markets, along with rising crude oil prices.

"Despite India's balance of payment (BoP) possibly turning into surplus in FY20E, we believe sustainable rupee appreciation is still an uphill task, given the general elections in 2019, MSCI Emerging Markets index rebalancing in Q2/Q319 and India's basic balance remaining in deficit despite the recent oil correction. We forecast year-end USD-INR at 72 for FY20," said Tanvee Gupta Jain, Chief India Economist at UBS Securities India.

Many others who manage the funds also believe that uncertainty around the elections is also impacting the rupee movement. "While markets eventually focus on earnings growth, around the Union Elections, there could be some volatility in the markets which could have some impact on flows both local and foreign," Karthikraj Lakshmanan, Senior Fund Manager at BNP Paribas Mutual Fund told DH.

The foreign institutional investors have been pulling out of the Indian markets in January, after flocking in for two months between November and December. So far in January, foreign funds have pulled out a net of Rs 5,287 crore from Indian debt and equity markets.

"The 2019 general elections will be critical for the rupee's fate throughout the year. Markets like certainty and continuity. A strong Modi mandate will be positive for INR assets and will give immediate impetus to INR. Opinion polls will, however, act as a precursor to the actual event," Sajal Gupta, Head, Forex and Rates, Edelweiss Securities said.

On January 21, the Brent crude oil prices in the global markets were trading at a two-month high of $61.34 per barrel, up 12.9% from $54.35 per barrel, exactly a month ago.

According to analysts, it's because of political uncertainties in India and some global economies that are driving the fund outflow. "Investors seem to be worried about the fiscal condition. Also, the next budget, by all the statements they have made, seems to be an expansionary budget. There is shutdown in the US along with uncertainties of Brexit. All of this is contributing to the rupee's fluctuation," says Kavita Chacko, Senior Economist, Care Ratings.