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June 5, 2024

Rupee Faces Volatility Amid Foreign Outflows Post Modi’s Narrow Election Win

Following Prime Minister Narendra Modi’s unexpectedly narrow victory in the recent general election, the Indian rupee is anticipated to depend on the Reserve Bank of India’s (RBI) intervention to defend the currency. The election outcome has led to potential foreign portfolio outflows, causing concern over the rupee’s stability.

Despite this, non-deliverable forwards suggest that the rupee will open largely unchanged from the previous session’s 83.53, remaining close to its all-time low of 83.5750 reached in April. The rupee experienced its most significant single-day percentage drop in a year on Tuesday, triggered by foreign investors’ reaction to the election results, which were tighter than expected.

Foreign institutional investors offloaded a record $1.5 billion worth of Indian shares on Tuesday, according to provisional data from the National Stock Exchange (NSE). This massive sell-off resulted in the NSE Nifty 50 and S&P BSE Sensex recording their worst day in over four years.

The rupee’s decline would have been more severe if not for the RBI’s likely intervention. The central bank is believed to have sold dollars near the 83.50 mark to stabilize the currency and is expected to continue its support in the coming days.

HSBC Bank noted that while the rupee’s immediate volatility might be managed, medium-term uncertainties have emerged. Pranjul Bhandari, chief economist for India and Indonesia at HSBC, highlighted the risks associated with portfolio outflows and the unwinding of carry trades due to election-related uncertainties. She emphasized that potential changes in the structural reform agenda could affect the rupee’s performance, and the RBI might prioritize building substantial foreign exchange reserves.

In recent years, the trend of moderate depreciation in the Indian Rupee’s Nominal Effective Exchange Rate (NEER) may not persist if there are significant shifts in economic policies. The RBI’s strategy might involve more aggressive accumulation of forex reserves to buffer against future volatility.

Contrasting with the rupee’s struggles, its Asian counterparts mostly showed strength on the same day, buoyed by increasing expectations that the Federal Reserve will cut interest rates in September. This divergence underscores the specific challenges the Indian currency faces in the current economic and political climate.

The immediate outlook for the rupee hinges on the RBI’s continued intervention to mitigate volatility. However, the broader implications of the election results on India’s economic reforms and investor sentiment could influence the currency’s trajectory in the medium term. Investors and market participants will be closely watching the RBI’s actions and the government’s policy responses in the wake of this electoral outcome.

As the situation unfolds, maintaining stability in the Indian rupee will require a careful balance of monetary policy measures and strategic economic reforms to restore investor confidence and ensure sustainable growth.

Read more latest news on R9 News

Jhumpa Lahiri

Jhumpa Lahiri

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