Indian Rupee: In It For The Long Haul?

Lior Alkalay - Contributor - Forex

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.

India GDP Growth Rate VS. Inflation Rate
Chart courtesy of

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.

India Curent Account To GDP
Chart courtesy of

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.

Lior Alkalay 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 for their opinion.

6 thoughts on “Indian Rupee: In It For The Long Haul?

  1. This is very well detailed and excellent analysis, i am deep heartedly appreciating this study, which covers all major factors and very clearly find out hidden opportunities.

    However, remarks and feedback, given here by some of Indians and other people, just reflects their extremely high prejudice towards India, and lack of readiness to understand or accept anything. Even though, this is backed with data and fact findings, they find it difficult to accept, simply because of all these are against their traditional hard core beliefs so far.

    All people are just focusing on certain worthless issues like Corruption, so called anti democratic activities, etc.etc. but after all corruption is global phenomena without any exception, and definition of level of democracy is often changing with Financial situation, so I think, alike none monitory issues are irrelevant for our Economy related studies.

    At this stage, overall current situation of India is looking so much illusive as well in a negative mode that most people across the world would never prefer to accept any growth potentiality or even such probabilities too, therefore. But so many hidden factors are working in such a silent manner that real Economical situation of India will be appeared not just in a surprising, but even shocking mode.

    As per my Technical Study of US Dollar - Idian Rupee exchange rate is concerned, INR 61 and 58 against 1 USD are near critical support levels, and if it breaks, i will not surprised to find INR 46 respectively, and finally even up to INR 38 against 1 USD has also a very strong probability. I believed this, far more then just some assumptions or guess, but well anticipated probabilities, which is backed with historical data, and Market Momentum. concerned time frame, I assume therefore will be less then a period of one year.

    This is purely Technical Study, so no scope or space for any personal Beliefs, emotions or likings therein.

  2. With Modhi at the helm India is getting destabilised more and more due to religious fundamentalism and divisive politics, that is how BJP grew and now came to power, that is how they plan to stay in power.

    If BJP continues in power in India and if its smaller outfits continue with their religious fundamental ideology then India will no longer be considered a Democracy. India will become a weak and an unstable economy. Good human capital and investment will leave India for safer destination.

    China will become much stronger and they will start aggressively encroaching on Eastern India and economically they will compete with India in IT and other fields. China will use Pakistan as a pincher move to further destabilise India.

  3. Indian rupee has never appreciated for the long haulers. if u look at the rupee over 50 years u can see its a terrible currency. in the 70s it was 1-2 rupee a dollar its depreciated a whopping 32-64 times. ur money would have been better off if held in US$. and moreover corruption is the main issue. in india from peons to top guns all want money to get things done. this adds to extra cost for businesses. so i really dont think its going to appreciate at all. most data are all fake.

  4. Corruption is a major disease for any country. As per my understanding and observation, corruption and anti-democratic activities are on the rise in India. Because of this reason, the future of India seems dull to me.

  5. For India a cheaper Re is critical to maintain its exports edge. Do you really see RBI permitting a significant rise in the INR vs USD/EUR - especially with oil already low and US market not exactly an enthusiatic Buyer?

  6. Sadly, the author does not understand how the Indian economy is working , dragging with its irreparable historical baggage and still stunted by it highly inefficeint handling , superficial bragging by leaders etc. Raghuram Rajan (Greatest contribution of previous UPA Govt,) is the only bright spot. But he is surely getting handicapped by several untoward political interventions into the Central Bank`s freedom. The biggest issue of India is Unmanageable Population Growth, nobody bothers . It is high time declare incentives for Single-child families so as to make the concept of population control positively popular... But nobody cares disappointingly.......

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