Indian Rupee became the best currency in Asia. Will it sustain its rally?

Indian currency just became the best performing currency in Asia from being the worst just five weeks ago.

Here are a few factors rallying Indian Rupee:

• Drop in global crude oil prices. Slip in the price of crude oil means lesser amount of rupees are being converted into dollars. Thereby, strengthening the Rupee against the dollar.
• Correction in trade deficit due to the increase in dollar sales by exporters pushing to close the end of the financial year in April.
• Investors capitalizing on market volatility and sentiments leading up to the national elections.

In addition to the aforementioned factors, analysts have further cited the influence of an unprecedented shift in the political-military landscape of India. To explain this further, we are using a snapshot from Google Trends below to compare the search volume on two different queries over time.

Data Source: https://trends.google.com/trends/explore?date=today%201-m&q=%2Fm%2F0296q2,%2Fm%2F089j6m

As we can see, the popularity of both the queries broke out on the 26th of February, 2019, which was the day the Indian Air Force launched an airstrike on Balakot in retaliation for an attack on its paramilitary forces by a terrorist group called Jaish-e-Mohammed. The rare show of military might by India under the leadership of PM Narendra Modi fueled new optimism, taking the popularity of his political party Bharatiya Janata Party(BJP) led National Democratic Alliance (NDA) to an all-time high. Therefore, improving their chances of winning a second term in the upcoming elections.

How did Balakot airstrike and PM Narendra Modi's popularity increase the value of the Indian rupee?

The drop in geopolitical risk and market expectation pegged towards a stable government has renewed investor confidence, which in return triggered a disproportionate amount of overseas fund inflow into the Indian economy.

Foreign portfolio investors (FPI) have net invested Rs 26,793 crore ($4 billion) in domestic securities this month helping Indian Rupee to bounce back from its abysmal low. Here is the data on FPI by the National Securities Depository Limited.

Data Source: https://www.fpi.nsdl.co.in/web/Reports/Yearwise.aspx?RptType=6

Will the Indian Rupee continue to appreciate?

Historically, we have seen high volatility in both the equity and currency markets leading up to the elections. This time around, with the prevailing investor sentiment coupled with market volatility, we can expect a sharper upward trend for the Rupee but it is unlikely to sustain.

If you are planning to send money to India, here are 2 important dates to follow:

• 23rd of March: The election result date. The volatility of the market is likely to rally the rupee to peak on the result date. Most analysts are predicting a resilient INR but we should see a slow decline for a few weeks after the election result date.
• 26th of March: RBI's USD/INR Buy/Sell Swap auction date. The Reserve Bank of India is set to auction a $5 billion plan to swap rupees for dollars with domestic banks to inject more liquidity into the economy. This will further prevent any appreciation of the Rupee.