The Indian rupee is on a roll after Prime Minister Narendra Modi led Bharatiya Janata Party to a resounding victory in Uttar Pradesh assembly polls.
The stock market has been in a buoyant mood after the election results with the Nifty hitting a new all-time high, crossing 9,000 level for the first time in two years and Sensex rising over 600 points in early trade on March 14, 2017. The Nifty50 hit its highest point of 9,122, surpassing its March 2015 record of 9,119 level.
Rupee too followed suit and opened strong and continued to gain through the trading session. The currency closed at 65.81 against the US dollar, compared to its previous close of 66.60. At current levels, the rupee is at its strongest since November 2015. It is also the third-best performing currency in Asia since the start of this year, according to data from Bloomberg.
On Thursday too, the currency rose another 47 paise to its 16-month high at 65.22 against the dollar in early trade. Here's why the Indian rupee is likely to perform better in the near future.
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Falling oil prices
Oil prices have been hovering near three-month lows of USD 48 per barrel, on concerns about rising US inventories and few clear signs that Organisation of Petroleum Countries will extend supply curbs beyond June. Low oil prices will keep India's import bill in check and narrow the trade deficit.
Emerging markets play
"India's relatively lower dependence on external trade, change in RBI's stance, and relatively strong policy and macro fundamentals, should lead the rupee to fare better than most of the EM currency basket," said Kotak Institutional Equities in its report.
Foreign fund inflows
Foreign institutional investors (FIIs) have turned net buyers into Indian equity markets after four consecutive months of selling. In February, FIIs bought Rs 10,485 crore of equity into Indian markets. Debt buying also turned positive with Rs 5,980 crore purchase. In March too, foreign investors bought around Rs 15,053 crore in debt and equity, reiterating faith of foreign investors into India's growth story.The rise in foreign fund inflows means Indian rupee is the only gainer against the US dollar this month. Since January 1, 2017, rupee is the third-best performer in Asia after Korean Won and the Taiwanese dollar.
Reform friendly agenda
PM Narendra Modi is expected to intensify his reforms process after the recent election win. After GST, PM Modi will be emboldened to embark on more reforms including reforming the retail sector, easing labour laws, and cleaning up bad debt at banks. Implementing the pending reforms will make the global agencies more optimistic on India's sovereign ratings. With BJP occupying power in more states, investors (FDI and FII) are likely to buy more into India's growth story and pump more funds into economy which will send the market and consecutively the rupee higher.
The US currency is slowly and steadily moving back to November 2016 levels when Donald Trump won the presidential election. Since November 2016, the dollar has been rising, even breaching the 103 level mark in January. But since the last two months, the dollar has lost all the momentum and hovered near the 100 dollar mark on a continuous basis. Today, after the Federal Reserve announced a 25 basis point hike in interest rates, the dollar index which measures its strength against a basket of major currencies saw its biggest one-day fall in two months.