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Will the Rupee Get Stronger Against the Dollar with the BJP in Power?

Updated on October 7, 2014
Narendra Modi (Norbert Schiller, Copyright: World Economic Forum). Creative Commons Attribution-Share Alike 2.0 Generic.
Narendra Modi (Norbert Schiller, Copyright: World Economic Forum). Creative Commons Attribution-Share Alike 2.0 Generic. | Source

The Bharatiya Janata Party and the National Democratic Alliance Victory in 2014

In nine phases of elections from 7 April to 12 May 2014, the voters of India gave the Bharatiya Janata Party (BJP) and their PM candidate Narendra Modi an absolute majority of the 16th Lok Sabha—the lower house of the Indian parliament—with 282 of the 543 available seats. The National Democratic Alliance, a thirteen-party coalition led by the BJP, obtained 336 seats in total.

One big question for the future is how the rupee will fare in the short and long term with the BJP in power. At the time of the election, the rupee's future seemed grim. One important factor in relative currency value is a comparatively low inflation rate: India's inflation in the past few years has been the fastest of the major Asian economies. The rupee lost 28% of its value from the end 2010 to the end of 2013. The current account deficit (CAD) touched dangerous levels and Moody’s downgraded India to just one level above "junk." Additional pressure comes from the threat of a quantitative easing (QE) taper by the central bank, making markets more tentative.

What has 2014 been like for the rupee? And what does the future hold?

Raghuram G. Rajan, RBI Chairman, World Economic Forum Annual Meeting 2011.
Raghuram G. Rajan, RBI Chairman, World Economic Forum Annual Meeting 2011. | Source

What Were the Predictions About the 2014 Elections?

Before and immediately after the election, the rupee strengthened against the US dollar. In the months leading up to the election, some foresaw a 35 or 40 per cent surge in the value of the rupee if the BJP could secure a clear majority. In addition, the CAD was expected to drop to around $45 billion from its height of $88 billion by the time of the election, and forex reserves were estimated to touch $300 billion. Observers hoped to see the Sensex outperform competing indices in the other BRIC economies.

What predictions did specific pundits offer about the election's impact on the rupee?

  • Citigroup’s APAC Head of Currency and Derivatives Sales, Adam Gilmour, had an extremely bullish position on the rupee in the near term. He predicted the rupee to strengthen from Rs. 40 to 45 to a dollar in the long term, should BJP emerge a clear winner.
  • Manoj Rane, Head of Fixed Income and Treasury at BNP Paribas, was more cautious. He believed the rupee was likely to settle between Rs. 62 to 65 to the dollar in the medium term following the elections.
  • According to D.R. Dogra, Managing Director and CEO of CARE Ratings, the rupee would remain volatile in the run up to the election. He predicted the rupee to settling between Rs. 61 to 63 to the dollar.
  • Jayesh Mehta, Managing Director and Country Treasurer, Bank of America, said “if the flows and momentum continue, the rupee will appreciate above 59 [to the dollar]."

Raghuram Rajan was appointed Governor of the Reserve Bank of India in September 2013, bringing cheer to the market. Under his tenure, in May 2014 the RBI announced the relaxing of curbs on gold imports, began to ease the pressure on the CAD, and backed off the threat of a QE taper for the immediate term. These initiatives were met with optimism, further backed by reductions in inflation and an improving forex situation for the rupee.

These changes took place after the 2014 general election. Foreign institutional investors, known as FIIs, have begun to cheer and investment flows are increasing in anticipation of post elections reforms by the incumbent government.

Source

How Have the Elections Affected the Rupee?

As predicted, in June 2014, the rupee hit its highest value in relation to the US dollar in twelve months. This bump was a relief to those who'd witnessed the rupee's free fall since last summer, when in August 2013 it bottomed out at Rs. 68.85 to the dollar.

This trend hasn't proved lasting, however, as in September 2014 the rupee started to slip again, to the tune of 2.1 per cent, hovering at Rs. 61.95 to the dollar. Foreign exchange experts expect the rupee to remain at Rs. 60 to 62 per dollar, as the dollar is appreciating compared to other world currencies, notably the euro and the yen. Foreign institutional investments have decreased since March 2014, with investment flows dropping from a $2.3 billion monthly average from March through July to just $865 million in September. The Sensex lost 0.1% in September, ending the index's streak of gains since January 2007.

Some experts attribute the rupee's diminishing power against the dollar to domestic economic improvement within the US. So while the hype around the ascendence of the BJP may have boosted the rupee's value in relation to the dollar, one could argue that the recent decline is not due to Indian economic or political events, but growth within the US.

Historic Data: Indian PM and Value of Indian Currency to the Dollar

Year
Inidan PM
Rulling Party
1 USD Equivalent to INR
1947
British Rule
British Rule
1
1947 to 1964
J.L Nehru
INC
4.76
1964 to 1966
L.B Shastri
INC
6.36
1966 to 1977
Indira Gandhi
INC
8.74
1977 to 1979
Morarji Desai
Janta Party
8.13
1980 to 1984
Indira Gandhi
INC
11.36
1984 to 1989
Rajiv Gandhi
INC
16.23
1989 to 1990
V.P Singh
Janta Dal
17.50
1990 to 1996
P.V Narasimha Rao
INC
35.43
1996 to 1997
H.D Deve Gowda
Janta Dal
36.31
1997 to 1998
I.K Gujral
Janta Dal
41.26
1999 to 2004
Atal Bihari Vajpayee
B.J.P
45.32
2004 to 2014
Man Mohan Singh
INC
60.36
2014 to present
Narendra Modi
BJP
61.95 (as of 1 October 2014)

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    • profile image

      tkk 3 years ago

      To encourage exports rupee is devalued but it creates huge CAD which is a burden taken by middle and lower income group.

    • Indian-economics profile image
      Author

      Indian-economics 3 years ago

      Absolutely right Mr Manoj Garg, our government and economy is too much dependent on the US market, if we import less than our INR get value, we all are thinking the same from the Modi Sarkar, Modi government will try to import less and export more.

    • profile image

      manoj garg 3 years ago

      dollar prices is growing due to bad policies of indian government if indian government wants it will be bane of import of some unnecessary things like cosmetics,costly cars, and bane also export of grain and useful shortage of necessary things of indian people because first indian government export that's items on low prices and later import high price so i request to indian government plz change business policies.

    • Indian-economics profile image
      Author

      Indian-economics 3 years ago

      Few experts are predicting, that might be INR will be stronger in comparison to USD, recently INR become few paise stronger than USD as BJP finalized their prime ministerial candidate, rest we can see in near future.

    • MG Singh profile image

      MG Singh 3 years ago from Singapore

      I do not think so as India is too poor and the population too big for any economic miracle to take place. The only thing that may help if the population is stabilized at the present level. BJP or Congress does not matter