The rupee’s rally after Prime Minister Narendra Modi’s resounding win in state elections may fizzle out, if what happened following his historic victory in national polls is any guide.
Bets that a majority win for Modi’s party in the key Uttar Pradesh state will embolden him to undertake more economic reforms and lure foreign investors to India sent the rupee surging to a 16-month high, making it Asia’s top performer this month. A similar rally around Modi’s victory in the 2014 national vote was followed by a more than 5% slide in the currency over the next six months.
The pattern will be repeated, according to Credit Agricole CIB and Australia & New Zealand Banking Group Ltd.
“The rally in the INR looks overdone,” Khoon Goh, the Singapore-based head of Asia research at ANZ, wrote in a 16 March report. “We expect to see some retracement of the currency once the euphoria fades, just as what we saw following the 2014 election of Modi.”
The rupee climbed 2% between 10 March and 16 March, its biggest four-day gain since early 2015, with the election results being declared on March 11, a Saturday. Overseas investors poured $1.09 billion into Indian stocks in just three days after the verdict, almost half of this month’s total inflow of $2.4 billion.
The relative-strength index -- a momentum indicator -- for the dollar-rupee was at 18.2 on Monday, below the 30-level that signals to some investors that the pair is oversold.
In 2014, the rupee rallied 2.5% over four days through May 19 after exit polls signaled a win for Modi, a prediction that was validated by actual results on May 16. The currency weakened 5.4% by 19 November, 2014. It sank to an all-time low of 68.8650 per dollar last November.
The 2014 national-election victory for Modi’s Bharatiya Janata Party and its allies was the biggest in India in 30 years. The BJP’s 312-seat tally in Uttar Pradesh’s 403-member assembly this month brings the party to power in the state for the first time since 2002.
While the current rally has led ANZ and Deutsche Bank AG to raise their year-end rupee forecasts, both lenders still see the currency weakening to about 67.5 per dollar by 31 December. The rupee rose 0.2% to finish at 65.36 in Mumbai on Monday. Deutsche previously estimated a slide to 70, while ANZ saw a drop to 69.5.
“With last week’s elections being a bit less significant, this means that the INR upside, if any, is very limited and it should soon resume its downward trajectory,” Dariusz Kowalczyk, Hong Kong-based senior emerging-market strategist at Credit Agricole, wrote in a 15 March report. An expected widening of India’s current-account deficit to the largest in three and a half years would further weigh on the currency, he wrote. Bloomberg