Rupee could rebound to levels last reached in 2008 should a Bharatiya Janata Party candidate be elected, Citigroup predicts.
India stocks soar as momentum builds ahead of general elections
Indian stocks surged to a record high yesterday amid building momentum ahead of the country’s impending general elections and forecasts that the rupee could rebound to levels last achieved in 2008 if the main opposition party wins.
The benchmark S&P Bombay Stock Exchange Sensex rose 1.06 per cent to an all-time peak of 22,04.72 in trading yesterday, while the Nifty, the National Stock Exchange’s benchmark index, rallied 1.09 per cent to reach 6,574.95 for the first time. The Indian rupee strengthened to 60.86 to the dollar yesterday compared to levels of about 62.60 at the beginning of last month.
Citigroup has predicted that in the long term, the rupee could firm to 40 to 45 against the dollar, should the opposition, the Bharatiya Janata Party (BJP), topple the ruling Congress Party – as polls suggest. India’s elections start on April 7 and results are scheduled to be announced on May 16.
Many expat Indians in the UAE and across the Gulf have been taking advantage of the weaker rupee by sending money home in the expectation of a rebound.
“We witnessed a remarkable surge in the volume of remittances to India last year as Indian expatriates were taking advantage of the weaker rupee which assured them more rupees for every dirham sent,” said Adeeb Ahamed, the chief executive of LuLu International Exchange. “The remittance trend across the UAE has remained upbeat in the first couple of months of 2014, mirroring the performance of 2013.” But the trend could hit expatriate workers hard - as their remitted dirhams buy less rupees at home.
The dirham is pegged to the US dollar, which meant that expats in the UAE could buy more rupees for each dirham that they earned as the Indian currency weakened.
The BJP is perceived as more business-friendly than Congress. Narendra Modi, the BJP’s candidate for prime minister and the chief minister of Gujarat, has been widely credited with playing a major role in the state’s rapid economic development in recent years. Many believe that if Mr Modi were to come to power, he could play a similar role in improving the business climate of the country.
“The market view is that if Modi gets in, it will be a game-changer,” Adam Gilmour, Citigroup’s head of Asia-Pacific currency and derivatives sales, told Bloomberg. “We always take politics with a pinch of salt, with the rare exceptions like India, where it’s going to really make a difference.
“A weak coalition would be the worst-case outcome,” he added, explaining that such a result could send the rupee to new record lows.
The Indian currency hit a historic low 68.84 against the dollar last August as funds flowed out of emerging markets and India battled with a high current account deficit and weak economic growth.
“The bullish run in Indian equity markets has seen the Indian rupee piece together a nice run over the course of the past few weeks,” said Gaurav Kashyap, the head of futures at Alpari ME, a global online currency and commodities broker. “Fundamentally, the prospects for the Indian rupee bode well as compared to the rest of the emerging markets – growth figures are starting to gain traction, and the inflation rate has dipped below 10 per cent but more importantly, favourable developments from the political front have led to the immediate gains we are seeing in the Indian equity segment.”
He predicts that the rupee could rise to 50.50 to 54.00 against the US dollar this year.
The stabilisation of the rupee has already led Indian expats in the UAE to hold back from sending money home, according to UAE Exchange, a remittance and foreign exchange company.
“From July to December there were good flows because the rupee depreciated and a lot of people borrowed money and remitted,” said Ashwin Shetty, the vice president of dealing at UAE Exchange. “January, February, March has been slightly on the lower side compared to the last six months.”
He forecasts that the rupee is likely to trade between 60 to 64 against the dollar this year and says that remittance flows could actually increase after the elections as Indian expats become more confident about investing in India.
“Now, if when the rupee depreciates even by one rupee, remittances pick up, and if it appreciates by one rupee, remittances come down, ” Mr Shetty said.
The GCC is the largest source of remittances to India. It accounted for 37 per cent of the total remittances to India in the past financial year, according to a study by the Reserve Bank of India. In the past financial year, remittances from the GCC to India rose to US$24.93 billion, from $24.382bn in the preceding year.
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