Rupee strengthens ahead of general elections

Momentum is building ahead of India’s next general elections taking place next month; and has the potential to fuel the rupee’s appreciation to highs not reached since 2008.

Elections begin on the 7th of April, with the results due to be announced on the 16th of May.

The possibility of victory for India’s main opposition party – Narendra Modi’s Bharatiya Janata Party (BJP) – provides the impetus for the currency rise; as voters seek to rebuke the ruling Congress for India’s economic slump and series of scandals.

On the 14th of March, the rupee traded at 61.19 to the dollar, but experts are predicting a BJP win will push the rupee towards 40/45 per dollar in the long term.

Goldman Sachs Group Inc. analysts believe the elections may be a catalyst to revive economic growth.

Worst case scenario

A weak coalition is said to be a worst case outcome, and could potentially send the rupee sliding below the record 68.845 witnessed in August.

The pace of recovery is at stake, with Asia’s third-largest economy only now gaining momentum after the global financial crisis in 2008.

Whilst the progress and stability of India’s current account – which Finance Minister Palaniappan Chidambaram forecasts will shrink from USD 45 billion from USD 88 billion – aided the rupees appreciation.

Whilst the currency increased at a faster rate than its regional peers, the ruling party election in next month’s elections face the challenge of steering a country with, almost, the slowest rate of expansion it has experienced in the last ten years.

Stock increase

India’s main stock index (SENSEX) rose to record highs last week; with around three stocks rising for every two which fell.

Overall, the index has risen 3.1% in 2014.

Goldman Sachs Group Inc. increased India’s rating from market weight to overweight; signifying that investors ought to have a larger proportion of India’s benchmark index shares.

“Liquidity has been very strong,” notes Geojit BNP Paribas Financial Services Ltd’s head of research Alex Mathews, “and the upgrade by Goldman Sachs will boost sentiment of foreign investors.”

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