Indian foreign exchange markets have seen considerable levels of volatility since the South Asian country’s unexpected election results, however analysts say the Indian rupee (INR) should be “range bound” in coming trading sessions.
The incumbent prime minister, Narendra Modi, was widely expected to win a sizeable majority and markets largely welcomed that prospect. Markets were optimistic because of Modi’s efforts in government to drive government spending in manufacturing, power, defence, and infrastructure, which has boosted activity in these industries and contributed to India having some of the highest economic growth rates in the world.
But while Modi’s Bharatiya Janat Party did secure an election victory, they no longer hold a majority and will therefore need to compromise on their agenda in order to pass legislation. In the immediate aftermath of the election results initially coming through, around $386 billion was wiped off India’s benchmark BSE Sensex index, the Indian rupee neared an eleven-month low, while yields on ten-year government rose by eight basis points, all reflecting greater perceived levels of political and economic risk.
Given this volatility on foreign exchange markets, Indian importers and exporters took steps to hedge a large portion of their forex exposure in the forward markets. Importers bought foreign exchange forward contracts worth $9 billion last week, a more than 70% jump compared to the year before. Exporters hedged $6 billion. The increased use of forwards contracts suggests fears that the rupee could depreciate, or at least see heightened volatility given the political situation, with businesses therefore keen to lock in current forward rates.
Anubhav Sahu, equity research analyst at Moneycontrol Research in Mumbai, told Disruption Banking that “while USD/INR movements have been relatively volatile since the time of the exit polls, it should be range bound in the coming days.” He suggested that markets will calm down after the initial political shock, particularly as it is becoming clear that Modi, despite his setback, is still retaining control.
“As per the portfolio allocation amongst the council of ministers, key ministries have been retained by the largest party, the BJP, implying that the policy focus seen in the recent past may be sustained,” Sahu said. “So, with policy uncertainty waning, foreign investment inflows (FIIs) may return on the margin.”
Sahu also pointed out that the broader macroeconomic environment suggest that the rupee should remain stable, particularly given India is due to be included in JPMorgan’s emerging market debt index, which should boost inflows from money managers tracking the benchmark index.
“The local currency continues to be helped by flows on the debt side,” Sahu explained. “Passive flows into Indian government debt due to include in the JPMorgan government bond index from June 2024 remains a key consideration. In addition, the economic outlook is getting revised to the upside. S&P Global Ratings has upgraded India’s economic outlook to “positive” from “stable” while the Reserve Bank of India has revised growth projections for 2025 to 7.2% from 7%.”
Despite the shock election results, it seems likely that the India rupee will trade in a stable fashion in coming trading sessions, particularly as the Indian central bank has consistently proved willing to intervene in markets to stem potential declines. Furthermore, the broad economic picture, in particular strong growth rates and India’s upcoming inclusion on the JPMorgan emerging market debt index, suggests that the rupee could benefit from strong foreign investment inflows in the near future.
Author: Harry Clynch
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