India’s Rupee, oh What a Mess

India’s Rupee, oh What a Mess
by, David Frank, Economist

Since India’s government announced a stunning demonetarization of nearly 88 percent of their available cash, the Indian rupee has been under heavy selling pressure. This morning, the rupee has already fallen to a record low of 68.66 against the US Dollar. The rupee has not been helped by the enormous Dollar rally in progress over the last few weeks. There is a lot of worry over the country’s demonetization drive as well.

The central bank has repeatedly intervened to slow the local currency’s slide as the rupee hit a previous low at 68.85, a level not seen since August 2013 when the country was mired in the worst currency crisis in more than 20 years. The Reserve Bank of India (RBI) intervened this afternoon spending nearly $500 million in the morning but the rupee was not able to find any real traction higher. As of 8:30 GMT, the rupee was down 0.4 percent at 68.82.

The rupee has shed nearly three percent this month, its biggest selloff against the almighty Dollar since August 2015. It has, however, done better than other emerging market currencies since President-elect Donald Trump shocking won the US Presidential election two weeks ago.

The rupee is expected to remain under pressure with the RBI continuing to intervene to try and taper the volatility but they will do so without defending any specific level, for now. It is not easy to determine where the rupee will be near-term. For now, India will monitor the president-elect’s transition and entrance into the White House to gauge his policy so they can have some certainty.

History repeats itself for the Rupee

In 2013 pressure on the current account triggered a heavy selloff in the rupee but this time India is in a better position to fight outflows from investors who are attracted to the higher yielding US Dollar. There are expectations that President-elect Trump will initiate an expansionary fiscal policy with tax cuts to drive inflation higher which in turn will lead to higher interest rates which are now behind the rising yield in US Treasuries. This has attracted investors into the US Dollar.

Since the November 8 US election, foreign investors have sold a net $1.6 billion from equity markets and an enormous $2.02 billion in debt.

Even though foreign investors are pulling money out of the Indian capital markets, the country does have relatively strong economic growth which should give some support to their beleaguered currency. There are some worries that Prime Minister Narendra Modi’s shocking move to ditch higher-denominated banknotes would put a slight dent into their economic growth rate.

He announced this move, to end higher-denominated bank notes on the eve of US elections which led to a lot of frustration among Indians who had trouble in getting new banknotes. This could cause a temporary slowdown in consumer spending and demand for products. Both power India’s economic growth.

India is also see net outflows tied to redemption in a strong US Dollar totaling around $28 billion. This comes from Indians living abroad which helped to end the crisis from three years ago.

This rupee crisis is also a strong test of the leadership skills of current and new RBI Governor Urjit Patel. He was deputy to his predecessor Raghuram Rajan who helped steer the country out of the last currency crisis, nearly three years ago. Investors will looking to him for the same acumen and skill to right the ship today.

from Bullish University http://ift.tt/2gkxDwB

from Bullish University http://ift.tt/2gDToYZ