Volatility is the hallmark of currency markets. The
rupee is expected to strengthen, in the wake of huge inflows of portfolio
investments, to levels far stronger than warranted by the Indian
economy’s fundamentals. This presents the
Reserve Bank of India with an opportunity to buy up dollars and accumulate reserves. It makes no sense to allow fickle capital flows to set the value of the rupee in a way that would harm real economic activity.
This is so, even if it is tempting for the government to use a strong rupee to cheapen imports, particularly oil and gas, and hold the price line in the run up to elections.
There are several reasons for the turnaround in the rupee’s fortunes from being the worst-hit emerging market currency to the most resilient in a matter of eight to nine months. One is the credible and creditable progress in macroeconomic management: the
fiscal deficit has been held in check and is on course to fall further, the current account deficit will compress sharply to less than 2.5% of the
GDP and
inflation has begun to ease. Another has to do with the political cycle. It is widely believed that political parties and their backers bring money back to India using foreign financial institutions, to meet the huge expenditure on the election process.
With unprecedented amounts being spent on media campaigns — legitimate and, if one believes
Arvind Kejriwal, illegitimate — hi-tech rallies and even relatively junior leaders flying distances that would put migratory birds from Siberia to shame, this promises to be one of India’s most expensive elections.
The final touted reason for foreigners’ newfound fascination for Indian
stocks is the prospect of political stability, with poll forecasts suggesting a very strong showing by Narendra Modi. The reality is that a renewed political mandate for the government at the Centre is sufficient to catalyse growth after elections. India has had only shaky coalitions and minority governments since 1989 but the economy has grown at its fastest pace in this period. Regardless of who forms the government, the economy should see renewed vigour after the elections.
