Over the past few months, the focus in the FX space alternated between a likely Fed rate hike to a possible Grexit to the woes in China. Justifiably, all of those matters will undoubtedly shape the dynamics and future trends of FX. But while the FX market has been busy focusing on the major currencies, opportunities might be passing by.
It may be that FX investors are missing some long-term value trends that could be rewarding if one exercises patience. One of those trends is the Indian Rupee. The Rupee's been hidden from center stage but is gradually being positioned into a long-term bullish trend. Now while that does pose some risk, it could become worthwhile for those willing to engage. So why now is the Indian Rupee on the verge of becoming interesting?
Rajan Raghuram - No One Saw Him Coming
Let's set the stage before the remarkable political "revolution" that we call Narendra Modi. We're talking back in the day when Prime Minister Manmohan Singh, the man many blame for India's stunted economy, was at the helm. Then, Rajan Raghuram was appointed as Governor of the Reserve Bank of India. While investors cheered the appointment, everyone was hanging their collective hopes on political change as the real promise for the Indian economy. This was only amplified when Modi, the renowned reformist, was elected (by a landslide) to the job as Prime Minister.
Fast forward a year and investors are finally realizing just who it is playing the pivotal figure in reforming and fixing India's economy. It's not Narendra Modi at all, but RBI Governor Rajan Raghuram. Raghuram is pushing hard for an overall modernization and reformation of the Indian central bank. Then, the RBI can be aligned with the Federal Reserve, Bank of England, etc., in terms of professionalism and reliability. These reforms include the appointment of only highly skilled economists, and not political appointees, to senior positions within the RBI. Moreover, the RBI wants to move forward with a monetary committee akin to the other central banks. Being able to set inflation targets and preserving its independence are two of Raghuram's primary goals. And that is exactly what the Rupee needs to become more stable and then later to regain strength.
India's Outlook – Turning Brighter
Shortly after Raghuram took the helm of the RBI, the Rupee was under severe pressure amid the rout in emerging currencies. Of course, that was largely ignited by the Russian showdown with the West. While EM currencies are still suffering, investors have the ability to examine each currency and its own circumstance and identify those that look bright. Yes, China does loom the EM currency space but there is no sense of emergency. If anything, the commodities selloff has allowed the RBI to tackle India’s inflation problem much more effectively. That, in combination with Mr. Raghuram's vigilance, has allowed India to improve on most parameters.
Some Bright Spots
GDP Grows and Inflation Falls- While GDP growth has accelerated above 7%, inflation has fallen below 6% (the RBI's upper range). These are very positive signs wherein growth recovers while inflation becomes more bearable. Thus, India’s bond market and, consequently India’s Rupee, become more stable.
Chart courtesy of Tradingeconomics.com
Bond Market Stabilizes - As can be seen from the Bloomberg charts below, bond yields on India's 10-year sovereign stabilized at around 7.8%. Now, this really is a big deal for a country that has been on the cusp of hyperinflation. With yields now stable, investors searching for attractive yields with safer returns could be compelled to buy into India's sovereign bonds. Even more so, if you take into consideration the relatively low yield environment around the world. And that's an important factor in supporting Rupee strength.
Chart courtesy of Bloomberg Press
Current Account Deficit Falls- The final bright spot is the improvement in the current account deficit, which has long been a weak spot for India. As can be seen in the current account chart below, India's current account deficit (as a percentage of GDP) has dramatically narrowed.
Chart courtesy of Tradingeconomics.com
Rupee in the Long Run
With those fundamental improvements and the RBI's 6% inflation pledge, the Indian Rupee could gradually appreciate and provide good returns for the patient investor. If Oil prices unexpectedly surge, however, the RBI's 6% inflation target could be hard to maintain. The Indian economy tends to be rather sensitive to Oil prices. In the long term, a rise in Oil prices could hurt Rupee returns. But let's not put the cart before the horse. Unless and until then, a long Indian Rupee trade could slowly and quietly become one of the most interesting trends in the coming year.
Look for my post next week.
INO.com Contributor - Forex
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.