Uncertainty over poll results could fuel volatility, but there are other factors to watch
While the upcoming general elections in India could spark market volatility, the Indian rupee is more likely to hold strong rather than fall against the US dollar over the next few months, an analyst said.
“The probability of Indian rupee rallying against the US dollar is very high,” said Yogesh Khairajani, research analyst at Century Financial.
A stronger rupee could dampen the remittance power of Indian expatriates in the UAE, who are among the world’s most prolific money senders. Indians based in the UAE sent home more than Dh17.6 billion between April and June last year.
The rupee had earlier dived to record lows, hitting 20.08 against the UAE dirham and 73.75 against the US dollar in October. The currency lost 15.53 per cent in value in less than a year and emerged as the worst performing currency among the fast-growing economies in Asia in 2018.
Other market analysts had earlier speculated that the Asian currency could weaken in the run-up to the local polls, as there will be uncertainty over the elections results. However, there are other factors that could lend support to the rupee, such as the fading prospects of a Federal Reserve interest rate increase.
“Markets hate uncertainty, but unfortunately elections are all about uncertainty. Under these circumstances, we would normally expect the Indian rupee to depreciate against the US dollar as recent opinion polls indicate there will be a hung parliament after Indian elections causing policy uncertainty,” said Khairajani.
“Nevertheless, there are a multitude of factors that influence the value of a currency and politics is just one of them,” he added.
He pointed out that the probability of an interest rate increase in the United States “has drastically come down.” “And right now, there is even talk of Fed pausing its balance sheet reduction plan.”
“This could boost the US dollar liquidity and lead it to a fall against other currencies. So, irrespective of the election results, we expect the USD/INR, as well as AED/INR [exchange rates] to fall to 67.58 and 18.40, respectively,” Khairajani said.