Indian rupee goes from worst to best-performing currency in Asia

It took just five weeks for India’s national currency to flip from worst to best performing currency in Asia. The rupee soared past its emerging market peers, bolstered by a weakened US dollar and a surge in foreign stock inflows.

Since the start of February, the rupee has gone from levels above 71 against the dollar, to about 69.1 on Wednesday, the strongest since last August. It was trading at 68.57 against the greenback on Friday.

Experts say optimism about Prime Minister Narendra Modi’s chances of securing a second term in the country’s upcoming elections (due to take place over April and May) and the recent eruption in tension between India and Pakistan are two prime reasons behind the rupee’s appreciation.

A weaker US dollar and the positive domestic equity market have also fueled the rupee’s rally, Forex dealers add.

“The high-yielding rupee will likely advance further if Modi wins a second term,” Gao Qi, a currency strategist at Scotiabank in Singapore told Bloomberg.

The expert, who expects the currency to rally to 67 per dollar by the end of June, said a dovish tilt by major central banks in the face of a faltering global expansion could also prompt foreigners to chase higher yields in emerging Asia.

Statistics showed that foreigners bought a net $3.3 billion in Indian shares through March 18, accounting for more than half the $5.6 billion of inflows year-to-date, and raised holdings of bonds by $1.4 billion this month. That sent the rupee to its highest level since August.

Some analysts say the value of the rupee will increase further if Modi wins a second term. Others claim the rally might be short-lived once elections start.

“The market is pricing in a Modi victory as there are no other factors that explain the sudden change of mood,” said Anindya Banerjee, an analyst at Kotak Securities in Mumbai.

“Once elections start, the inflows might slow down to some extent, but if Modi returns to power with a strong coalition, then the rupee will rise further which will then force the RBI to step up its intervention,” Forex dealers told Reuters.

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