PM Narendra Modi’s victory will help rupee gain strength

MUMBAI: Saturday's resounding victory in state elections will give Prime Minister Narendra Modi the political space to drive reforms and stabilise his policy agenda, paving the deck for more overseas investment to help strengthen the rupee and push bond yields lower in Asia's third biggest economy.

The rupee, which had earlier slid against the dollar amid increasing investor attention on the US, may strengthen up to 66 against the greenback by the end of this year, according to an ET poll conducted among 15 market participants. The currency closed at 66.61 on Friday before elections were called to the crucial state of Uttar Pradesh and four other provincial assemblies.

Prime Minister Modi's Bharatiya Janata Party won robust victories in India's most populous state, Uttar Pradesh, and its neighbour, and was staking bids to form the governments in two others.

The scale of BJP's victories is perceived by analysts to strengthen the Modi's political base, which is key to driving difficult financial reforms in the nation of 1.2 billion people. The victories will also help the BJP bolster its membership in the Rajya Sabha, where it currently lacks a majority.

The majority of currency experts polled by ET indicated a stable currency through the year, with minimum prospects of wild swings. Barring a few institutions, respondents have lowered their expectations of record low exchange rates. "Investors will gain confidence from the political stability afterthe latest results," said Ashish Vaidya, head of trading and ALM at DBS Bank.

"With the ruling party getting more power, it will be easy for it to pursue business reforms quickly. Overseas investment are likely to rise, defying the prospects of any fresh rupee low this year. Rather, India will shine more among other emerging markets, some of which are facing political turbulence."

Emerging markets such as South Korea and Turkey face likely political headwinds. "An expectation of political and policy continuity will now enable higher investments in greenfield projects, which in turn will aid the country's economic growth," said Saugata Bhattacharya, chief economist, Axis Bank.

"A stable exchange rate boosts investor confidence by bringing down hedging costs." Overseas investors normally don't cover their portfolios from currency fluctuations if the exchange rate is largely stable.

"The rupee will gain reversing any depreciating trend," said NS Venkatesh, executive director at Lakhsmi Vilas Bank. "With the latest political mandate, reforms measures will be strengthened. This will help attract more overseas inflows — both through foreign portfolio investors (FPI) and foreign direct investments."

FPIs have net invested Rs 22,654 crore in domestic equities and debt securities this calendar year, compared with Rs 2,863 crore in the first three months of the previous year, show data from depository NSDL. To be sure, large foreign banks Bank of America and Deutsche have retained their rupee calls at 70 a dollar in the poll.

"The exchange rate is likely to be driven by global dollar movements after April when seasonality would turn against the rupee," said Indranil Sengupta, India chief economist at Bank of America Merrill Lynch. India's debt market is also optimistic of lower yields after the election results. The benchmark bond yield could dip up to 40 basis points from the current level, pushing prices up by year-end, the ET poll shows.