The answer to why the Indian currency looks ugly is not the coming elections as one would like to believe. Though election-induced volatility is real, it doesn’t hold much water in the long run as past election years have seen the currency appreciate in the run-up to the poll results, according to HDFC Bank research. “While elections-related uncertainty do affect Indian markets, it’s tough to draw a definite causality," the top private sector lender said in a note.
Ergo, the reasons are the good old trio of oil, growth and returns. Considering oil’s climb of nearly 26% so far this year, the trade balance for India is not looking pretty, especially as the trade deficit has grown 9% year-on-year for the first 10 months of FY19. Foreign investors haven’t warmed up to Indian bonds even today and are worried that equities are overpriced.
Most of these variables are difficult to predict and hence, there seems to be no consensus among analysts as to which way the currency will go. The median of the forecasts of the top-30 respondents for the rupee shows that the currency would hardly budge from its current levels this year. The median forecast is 70.66 to a dollar, a mere 0.6% gain for the currency.
Abheek Barua, chief economist at HDFC Bank, puts a base-case scenario of a marginal appreciation in the rupee, drawing strength from improving domestic growth. “India is expected to buck the trend. GDP growth is likely to be robust, at around 7.3-7.5% despite a slowdown in global growth," he said.
Given that key variables such as domestic growth, oil prices, global sentiment and elections are still evolving, this could be a year of sitting tight for the rupee.