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Modi’s Polls Success Makes Indian Money a Mixed-Bag for RBI

The recent election victory has presented a dilemma as foreign inflows get a boost from Modi’s election triumph. The recent gush of foreign inflow for the last three months has made the rupee a top performer in the Asian market. The foreign inflow is likely to accelerate more and the Reserve Bank of India may have to bridle in or else the value of exports becomes less competitive and rival currencies start to weaken. The rupee appreciation is a double-edged sword that could see the competitiveness of the currency affected too.

To make Indian money more competitive for exports, the country may lure $22 billion of capital inflows until March next year which would prompt the RBI to buy more dollars that would bolster the reserves and reduce a cash deficit. This move, however, would put the RBI and American Central Bank at odds with their counterparts in China, South Korea, and Indonesia who are still stemming losses from the raging trade wars. This is according to Bank of America’s Merrill Lynch.

In March, the RBI bought dollars’ worth $9.4 billion, the most since 2015. In other two swap auctions since March, the authority took in another $10 billion in a move meant to ease a cash crunch. The RBI could kill two birds with one stone by reining in on the anticipated foreign cash inflows. By preventing the gain in strength of the Indian rupee, the reserve bank could be buffering up their reserves and injecting liquidity.

However, the excessive use of foreign exchange intervention could prove a risky move only after India was removed by the U.S. Treasury from the currency manipulation watchlist last week. The Reserve Bank of India will want to be more cautious so as not to attract the attention of the United States. The RBI has responded by saying it does not intervene in the forex market to elevate particular levels of the rupee but only to curb undue volatility. The currency has continued to rise representing a 2.2% gain from the past three months.

What is the future of the rupee?

The recent removal of duty-free exports for some Indian products by the U.S. could present some pressure in the near future. India exports close to 2000 products to the U.S. free of duty. This exception has been removed and Indian exporters could lose up to $260 million worth of accrued benefits, according to the country’s export body.

However, the export restrictions are not likely to have a huge impact on the rupee and inflows. The Reserve Bank of India is expected to curb the gains even as the inflows continue to stay.

Modi’s win at the polls has elevated the appeal of Indian assets, while the drop in oil prices, which is India’s biggest import, and drop in U.S. yields has helped improve the prospects of the currency by a mile.

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