Indian Rupee Doing Well, but Resignation of Acharya is One of a Number of Emerging Headwinds
Above: Viral Acharya, outgoing Deputy Governor of the RBI. Image (C) Pound Sterling Live, Still Courtesy of Bloomberg.
- Rupee is meeting multiple headwinds
- Resignation of INR deputy governor is one
- The other is increasing trade tensions with U.S.
The Indian Rupee is facing increasingly bearish fundamentals which could act as a headwind to further appreciation and even threaten the currency’s entrenched rise in value versus the Pound.
The currency appears to have finished its brief honeymoon period following the re-election of Narendra Modi which provided the Rupee with support due to his pro-reform credentials.
Now it has been hit by the resignation of one of its leading central bankers and the threat of a trade war with the U.S. which could have a disproportionate impact on growth.
The recent resignation of Viral Acharya the deputy governor of the Reserve Bank of India (RBI) is significant since he was a known monetary policy hawk and fierce advocate of central bank independence. He was one of the few hawks on an otherwise dovish central bank committee.
Without his influence the RBI is more likely to ease policy than were he still present. The chances have also increased that the government could start influencing the RBI to ease policy.
This means interest rates are more likely to fall - both further and more rapidly than before, with negative implications for the Rupee.
Lower interest rates would probably weigh on the Rupee by reducing net capital inflows, by making India a less attractive destination for foreign investors to park their money.
The impact in the case of India is likely to be less because the country has stricter rules regulating capital cross-border flows, however, these were relaxed recently, allowing foreign investors to hold larger positions in the Indian bond market.
“We see greater likelihood of another rate cut in the near term. His departure marks the loss of a healthy debate in the monetary policy committee (MPC) and a healthy voice on markets and stability, which could compromise fiscal discipline and rekindle concerns over RBI’s independence,” says Magdalene Teo, a fixed income research analyst for Asia at Swiss investment bank Julius Baer.
Acharya’s resignation follows that of the former governor Urjit Patel, who had several fierce clashes with Modi’s government over reducing interest rates. The government wanted the RBI to cut rates but Patel objected. After he resigned, “the central bank has shifted away from its tight policy stance and delivered three rate cuts, in line with the government’s wishes,” says Teo.
A joint government-RBI panel is currently reviewing the scope of use of RBI reserves which the government wants to transfer to the Treasury for use in fiscal spending.
Archaya was a known opponent of using RBI reserves for fiscal spending.
Such a move seems increasingly likely now with one less opponent. Its impact on the Rupee would be difficult to assess, for although it would constitute a form of easing and be expected to weaken the Rupee, much would depend on how markets viewed the prospect of a boost to fiscal-spending.
Trade Tensions Increase
The other headwind facing the Rupee is the decline in trade relations between the U.S. and India.
The start of the decline began on June 1 when President Trump ended the two nation’s free trade agreement on $6.0bn worth of previously duty-free goods which had benefited from ‘preferential treatment’. This was part of Trump’s attempt to close the U.S.’s trade deficit.
India retaliated on June 15 by raising tariffs on 28 types of U.S. imports, mainly agricultural. This was designed to hit the U.S. president’s support base much as China’s ban on soybeans had.
There is an increasing risk Trump will increase tariffs on Indian goods as tensions escalate.
Trade with the U.S. is quite important for India since it is the only major trading partner with whom it runs a trade surplus. If the U.S. were to heavily tariff Indian imports that surplus would probably dwindle.
Trade surpluses are positive contributor to GDP so a loss of the surplus with the U.S. would have implications for Indian growth.
A fall in growth is likely to lead to weaker growth, lower interest rates, and a weaker Rupee.
“The USD/INR could reverse the dominant downtrend from October 2018 if trade tensions between the United States and India escalate in an already anxious market environment,” says Daniel Dubrovsky, and analyst at DailyFX.com.
Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.
* Advertisement
Implications for GBP/INR
The implications of these fundamental headwinds could turn the tables on the current bear trend in the Pound-to-Rupee exchange rate.
The current decline is largely driven by a combination of a decline in Sterling on Brexit woes and INR strength following the re-election of the Modi government.
These new headwinds now pose an increasing risk that the pair could reverse its current dominant downtrend at the point that it is trading on a critical level.
The pair has formed a large, bearish, head and shoulders (H&S) topping pattern on the weekly chart which threatens to break down and lead to substantially lower prices.
A break below the H&S’s neckline at roughly the 87.13 lows would confirm a breakdown. The downside potential of such a move would be at 84.75 initially, and 80.75 eventually.
A break above the trendline connecting the head and the peak of the right shoulder would cancel the bearish H&S pattern, however, and lead to strong recovery higher. Such a break would be confirmed by a close on a daily basis above 90.00.
Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.
* Advertisement