The Indian rupee, one of Asia’s worst performing currencies last year, has surged more than 3 percent since February on the back of election hopes. But experts say this “relief rally” is unlikely to last.
Since the start of February, the rupee has gone from levels above 71 against the dollar, to about 69.1 on Wednesday — the strongest level since last August.
That turn in fortunes for India’s currency has largely been fueled by optimism in the country’s upcoming elections, due to take place over April and May, experts said.
According to a Wednesday note by research firm Capital Economics, the rupee has outperformed all other emerging market currencies this month, in part due to recent opinion polls showing that the ruling Bharatiya Janata Party and current Prime Minister Narendra Modi are on course to win.
“We believe that the Indian rupee has, in the short-term, become a barometer of the Indian elections,” Singapore bank DBS also said in a note on Wednesday.
That’s best reflected by a surge in foreign inflows, DBS analysts wrote, citing that foreign investors bought $3.3 billion worth of shares in March so far — more than half the $5.6 billion in total this year. That has boosted markets — India’s benchmark index Nifty 50 as well as the Sensex index have both shot up about 8 percent in the past month.
That’s a far cry from the rupee’s flagging fortunes last year. The Indian currency fell to record lows in 2018, with experts attributing it to rising oil prices and emerging market woes.
‘Relief rally’ unlikely to last
But analysts sounded a note of caution, warning that the rally could be short-lived.
That appreciation in the rupee is a “relief rally,” DBS said. Capital Economics echoed the same sentiment, saying: “We doubt that the rally in (the) rupee has much further to run.”
DBS said the rupee has been supported by favorable external conditions such as the Federal Reserve’s pause in rate hikes, global markets recovering on optimism that the U.S. and China will reach a trade deal, and Brexit hopes.
“Unfortunately, none of these factors are firm,” DBS said in its note.
“We are still looking for two Fed hikes in the second half of this year. As for the negotiations, there are no guarantees that intentions would lead to a US-China trade deal in 2Q19 or that the UK avoids exiting the EU without a deal on March 29,” the Singapore bank said.
Analysts at the bank noted: “We remain mindful that Modi’s first term resulted in record lows for the rupee on twin fiscal and current account deficit and rising external debt.”
Meanwhile, Capital Economics said that expected slower growth in the U.S. would cause the S&P 500 to slump and push investors “to retreat from risky assets generally.”
It predicted that the rupee would drop to 75 against the dollar by the end of 2019, while DBS was more optimistic and said the Indian currency might end the year above 70.