Rupee: from fragile currency to super currency

Under the rule of Indian Prime Minister Modi, the rupee has risen from a fragile currency to one of the strongest currencies in the emerging world. The Indian elections have a major impact on the future of the country and the rupee.

In the Dutch House of Representatives elections, the first results are often known half an hour after the polls close. In recent times, Schiermonnikoog was the municipality that published the first final score. In India it works very differently. Although part of the population will vote next Friday, the results are not expected until June 4. With approximately 968 million voters, India is the largest democracy in the world. To ensure that there are enough staff to man the polling stations and monitor the elections, there are seven different phases. The election circus keeps moving to a different area, because Indian law stipulates that no one has to travel more than 2 kilometers to cast their vote.

Economic growth miracle
Incumbent Prime Minister Narendra Modi is favorite to start his third term soon. Since coming to power in 2014, he has accelerated economic growth with ambitious reforms and major infrastructure investments. With a GDP of an estimated $4.100 billion, India is the fifth largest economy in the world this year. In 2014, the country, with a GDP of just over $2.000 billion, just barely made it into the economic top 10. This economic rise is also the main explanation for Modi's popularity. According to the United Nations, more than 12% of India's population now lives above the poverty line. In 2015, that percentage was still 25%.

Rupee is stronger than he seems
At first glance, there is not much to notice of the Modi effect in currency markets. Against the euro, the Indian rupee has lost approximately 2014% of its value since the summer of 20. However, this decline in value conceals the fact that the currency is much stronger in almost every respect than it was a decade ago. At the time, investment bank Morgan Stanley still had the rupee at the so-called fragile five scissored. That was a basket of currencies from countries with a large current account deficit and limited foreign reserves. Partly thanks to a remarkably strong stock market, a lot of money has flowed to India in recent years. Foreign currency reserves reached an all-time high of $646 billion in early April.

Ambitious goal for 2030
The Bank of India uses the large financial room for maneuver to dampen the exchange rate fluctuations of the rupee with tactical purchases and sales. Against the euro, the currency has risen by almost 4% this year. And compared to the dollar, the rupee fell by 0,5%. That correction is very modest compared to other emerging world currencies. If Modi wins the elections, the Indian economy and the rupee will be well on their way to an even bigger role on the world stage. There is certainly no lack of ambition: the Ministry of Finance predicts that India will be the third largest economy in the world with a GDP of $7.000 trillion in 2030.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.