BJP poll performance likely to negate Fed hike impact

Foreign investors would likely increase the flow into Indian assets and this will boost the rupee

Last Updated : Mar 14 2017 | 12:40 AM IST

The US Federal Reserve is almost certain to hike rates on Wednesday but that has been fully factored in by markets abroad and in the country. So, the overwhelming victory of the Bharatiya Janata Party (BJP) in the Assembly elections would be a big boost for the rupee, though bonds will continue to be driven by other factors, said experts.

The dollar has weakened as US President Donald Trump’s trade rhetoric and open remark on dollar strength have dampened the appetite.

“On top of that, the European Central Bank’s recent stand that it might start raising rates has dealt a blow to the dollar’s value globally,” said Satyajit Kanjilal, head of Forexserve, a currency consultant.

As the dollar slid, the rupee has benefited but the BJP’s poll performance will be seen as a major boost for the reform story of India.

Foreign investors would likely increase the flow into Indian assets and this will boost the rupee.

“The overall impact on the rupee will be very positive,” Kanjilal said. He expects rupee to open at 66.20-30 a dollar level on Tuesday.

However, Fed’s language would be closely watched.

“While the markets across the globe have mostly factored in an imminent hike, everyone will closely watch Fed communication over the assessment of the scenario and any changes in the stance and the strategy front,” said Soumyajit Niyogi, associate director, core analytical group of India Ratings & Research.

In the overseas non-deliverable futures (NDF) market overseas, rupee is trading at 66.15-30 a dollar, about half a percentage point stronger than its previous onshore closure of 66.61 a dollar. Rupee’s real effective exchange rate (REER) is likely to strengthen against major currencies as the euro has strengthened against the dollar while the yen too has marginally strengthened. Dollar overall has fallen quite sharply in the past few days.

On March 1, the dollar index, which measures dollar strength against major currencies, was at the 102.2 level. On 13 March, it was 101.2. After the US Fed raises rates, the index would likely fall a little more.

Kanjilal expects rupee to strengthen to as much as Rs 62.50-63 a dollar level by June.

However, for bond market, the situation could be a little tricky. Bond market would unlikely rally like the currency and equity markets because most of the investors on bonds are still the domestic institutions, particularly banks. Ahead of the March closure, the banks would likely suffer from liquidity squeeze.

“Impact on liquidity after withdrawal of restrictions from banks will be closely watched, as overnight rates are already below policy rates,” said Niyogi of India Ratings.

And the prospect of a rate hike by the Reserve Bank of India (RBI) still is a dampener for Indian bonds.

The foreign investors are no longer heavily invested in Indian bonds. In February and March, they have turned net buyers of bonds after four months. As on March 10, only about 74 per cent of the total available Rs 1.5 lakh crore of debt limit has been utilised by the foreign investors. Earlier, these limits used to be fully subscribed. But BJP’s win may change the situation and the remaining limit might get lapped up soon, say experts. That will be positive for bonds.