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Rupee mostly depreciates in Lok Sabha pre-election year

Author: Kumar Shankar Roy/Wednesday, May 30, 2018/Categories: Currency, Expert View

Rupee mostly depreciates in Lok Sabha pre-election year

When the Indian rupee is weak against the US dollar, it will affect any investment done abroad like foreign education and foreign travel. And if history is to be believed, the 2019 Lok Sabha election is why the Indian rupee has weakened versus the greenback. Yes, the historical impact of LS polls on rupee seems to be playing out in 2018. Data shows a clear depreciation trend in the fiscal before general elections in 4 out of 5 occasions. With the rupee near its all-time lows, it’s bad news for importer stocks and related corporate earnings.

Ratty Rupee 

While the stock market shows positive returns in the Lok Sabha pre-election year, there is no such luck for the Indian rupee. The local currency seems to react negatively with all the volatility ahead of the LS polls. Yes, the rupee depreciates by almost 8-9 per cent in the fiscal year preceding a general election. 

For instance, in 1995-1996 the rupee fell by 8.6 per cent as it moved from 31 to 34 levels versus the US dollar. 

In 1998-99, the rupee dropped 7.4 per cent from 39.5 to 42.3 versus the US dollar. 

In 2008-09, the rupee slumped by a whopping 26.5 per cent from 40 levels to almost 51. Remember, the subprime crisis was raging in 2008.

In 2013-14, the Indian currency depreciated by over 10 per cent from 54.2 to almost 60 as the taper tantrum grew loud. 

In FY19 so far, the rupee versus the US dollar has dropped from 65.1 to 68.2 levels (touched 68.5 intra-day recently) in an over 4.3 per cent decline. Experts now see the rupee reaching 70 in quick time, and that could happen in the next few months.

The only exception to this rupee depreciation in a pre-election year rule was seen in 2003-04, when the rupee actually gained 8 per cent to climb from 47.4 to 43.6 levels. Do remember that this was an exceptional year when India enjoyed a current account surplus.

Reversal of fortunes

In the current context, if the crucial 69 level is breached, average 8.5 per cent depreciation may find its next major stop at 70.5 for the rupee versus the dollar, say technical analysts. It’s a vicious cycle for the rupee. Since the past two months, the currency was weakened on account of rising value of US dollar, and a sharp rise in oil prices. Fear of deteriorating macros has also led to FPI outflows, which further put pressure on the rupee.

Interestingly, it was foreign portfolio flows into the debt market, spurred by higher real rates, that was responsible for the rupee appreciation some months ago. These flows have stopped, and reversed to some extent, taking the rupee along with it. In fact, this was a trade that was mostly done by October 2017, but the sovereign rating upgrade and positive equity market sentiment provided final legs to the rupee rally.

Oil’s rise does not also bode well for the rupee. India imports most of its fuel from abroad. If crude oil prices average above $90/barrel, this will push up India’s CAD to unsustainable levels, upwards of 3.5 per cent of GDP. A $10/bbl increase in crude oil price pushes up CAD by about 0.4-0.5 per cent of GDP, data shows.

Your money

A weak rupee positively benefits remittances to India, and redemption of foreign investments. But, it has a mixed impact on equity investors because the benefits accruing to export sectors are nullified by issues faced by importer firms.

Aspiring students for next year foreign education admissions will have to pay more for the forms of exams. For existing students, the overall budget will definitely be affected as application fee, examination fee, tuition fee and cost of living becomes dearer.

Travelling abroad is a bad idea too. The cost of travel could go up by at least 10-15% due to a weak rupee unless you made the booking many months in advance.

Unfortunately, patients going abroad for treatment will also see an increase in cost due to the rupee's fall. 

A weaker rupee leads to increase in the cost of imported food items. Similarly, LED televisions, refrigerators, air-conditioners, laptops, mobile phones, cameras, with imported components will also see price increase if the rupee sustains its weakness.

(The author is a financial journalist with over 13 years of experience)

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Kumar Shankar Roy
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