USD/INR - Indian Rupee at 8 Month Highs as India Elections Kick Off

2014-04-09 16:01:00 Gregory Marks

Talking Points:

-1.5 Month election cycle kicks off.

-USD/INR hits 8 month low on EM strength, USDollar weakness.

-Inflation risks in 3Q pose challenges to price levels, confidence in RBI.

The Indian Rupee hit highs (USD/INR lows) not seen since this past summer over the past two weeks as the one and a half month election cycle kicked off. Elections are expected to go until mid-May and although confidence in the results has helped the Indian Rupee as of late, that confidence is at risk as more accurate poll numbers are released. In addition, a lifting of gold restrictions over the coming months pose risks to India’s trade balance, although softening crude prices in 2Q may help offset any expansion of the deficit.

Massive USDollar weakness over the past few weeks has also helped the Rupee and other EM currencies take back some gains after a volatility start to the year. The Rupee is currently the second best performer YTD among the EM majors with the Brazilian Real (USDBRL) leading the pack.

USD/INR Risks for 3Q: Inflation & the RBI

Although inflation data has come in a tad bit better than expected over the past few weeks and optimism surrounding the Reserve Bank of India has helped further mitigate USDINR strength, risks remain for higher prices in the third quarter. Not only do we see global food prices pickup in 3Q, we often see crude prices move higher in June and into year end. The Reserve Bank of India under Dr. Rajan has made clear that short term growth will be sacrificed for longer term stability in price levels and this may mean more rate hikes in the third quarter. If weakness out of China and EM continues to play out in the coming months, higher rates will likely impact the economy to a greater extent than the last few have. Market participants over the coming days and weeks will continue to search for a solid low in the greenback before building any bets once more against the EM block.