Jan 07 2019

SP-BSP Combine to Dent Rupee Aspirations?

Rupees roller-coaster ride in 2018 is looking to repeat history with fresh waves of volatility going to hit sooner than later. While oil has helped rupee stage recovery from 74.40 to 69.50 lately, the political calendar will keep markets on toes for next 5 months.

We closely look at defining factors (below) which will set the stage for high volatility in next few months.


Election Narrative – Unlike in 2014, the current narrative is being set by Rahul Gandhi while the entire BJP dispensation is busy defending the aggressor. BJP’s recent rout in state assembly elections have put them on backfoot. Surprisingly, the ruling dispensation isn’t talking about ‘The Next 5 Years’ in terms of delivery, reforms, job creation and addressing farm distress.

Allies Management – We have been bearish on NDA led government since beginning of 2018. The foremost factor which we noticed early was marginal treatment of BJP allies & treatment given to senior leaders within the party.

Seat Mathematics – The largest state UP will ring in a surprise for BJP which will find it difficult to garner 30 seats. The recent rout in MP, Rajasthan & Chhatisgarh may lead to 35-45 seats loss in these states. Looks BJP is going to miss Jayalalitha in TN politics with DMK looking to be a clear winner. The savior will be gains in North-eastern states.

Overall, we feel BJP on its own will not cross 210 seats. A number lower than 220 will have low acceptability for NaMo to lead the government. Nitin Gadkari may emerge as the next best alternative.


 Fiscal Slippage–Recent failure in state assembly elections points to shift in electoral base towards the party which can distribute freebies. This should give clear indication to Narendra Modi led government to take extra steps to dole out incentives, freebies. In a bid to woo larger base of electorate, the government will need huge cash piles to spend on socialist measures leading to strained budgets. We should also not forget that incrementally there are signs of global slowdown & government will be pushed to dole out incentives for business expansion & job creation.

Foreign Capital – The chorus of ‘If Modi doesn’t win’ from investor community has been getting louder for last 4-5 months. We believe capital will sit idle for clarity to emerge on Lok Sabha elections. The recent rout in equity markets and elevated bond yields will see higher allocation of capital in debt markets. Overall, we see subdued activity from foreign investors.

Crude Oil – The dramatic fall in crude prices is likely to continue with Brent expected to range between $48 to 65/barrel for next couple of months. Surprisingly, consumer prices have not come down in equal proportion whereas OMC’s refining margins have expanded. Clearly, Modi is playing with fire.

RBI Autonomy –  Global investors are keenly watching developments in RBI. Central government efforts to cash out excess reserves will be credit negative & reduce RBI’s ability to intervene in markets to clampdown on volatility. Government should restrain from meddling in the affairs of Reserve Bank.

We clearly indicated to our clients to hedge dollar payables the day SP-BSP alliance is announced in Uttar Pradesh. This will play havoc with prospects of BJP’s landslide win in the most populous state. We put our neck out for domestic currency depreciation trends going into Lok Sabha elections. Look for 71.50 in short-term.