Since Feb’18 Myforexeye has been a bear as far as domestic currency is concerned. On 20th Feb 2018 I wrote an article describing chain of events which may lead Rupee to 67.75 from 63.75. My connects on LinkedIn unanimously disagreed with the extent of depreciation suggested in that report. They were right. The unfolding of chain of events led to significant downside in Rupee to 74.40 in less than 8 months. All consumers of FX were beaten down by storm.
Ever since we have been receiving umpteen number of queries on assisting clients to manage forex risk pertaining to international business. And the bottom line of all discussion leads to clients believing (mistakenly) we know where the market is going. Irony is, we have no idea of when markets are going to turnaround or break ranges. In this fast changing world little help comes from technical analysts in outlining the support & resistance in near to short term. But will it (technical analysis) help clients manage forex risk when trade cycles are between 90 to 180 days? I don’t think so.
In 2019, let me try to decode the way forex markets may behave.
#Election 2019 – This election will throw the public in a quandary to choose better of two devils – The Mahagathbandhan or NDA led by NaMo.
We have still not dissected the issues that the amalgamation of dozens of parties is going to create at the ground level with party worker’s enthusiasm and morale.
In all likelihood, it will be a fractured mandate with BJP being called to form the government – being the single largest party. The choice of Prime Ministerial candidate will depend if BJP gets >220 seats (NaMo) or gets restricted below 220 seats (Nitin Gadkari becoming the choice of leading the NDA coalition).
In all possibilities, a state of confusion for foreign/retail investors, equity markets etc., will likely be Rupee negative in run up to the elections.
#Budget – We expect a socialist budget with large focus to address farm distress & wooing low income groups. It is expect the government will shun fiscal deficit targets to save itself from the ire of people living in distress due to lack of job creations.
We, at Myforexeye, feel an additional burden of Rs.2 lakh crores will be put on public exchequer to dispense negativity around BJP led government. There will be a large divergence and ratings agencies will punish domestic equity & currency markets dearly.
#Interest rates (debt markets) – The foreign funds flow to debt market will take a beating with Indian markets quickly changing gears from rising interest rates (when crude was galloping towards $100/barrel) to cuts in rates. This will narrow the interest differential resulting in outflow of funds from debt investments.
#Coalition ruckus – In the event opposition is able to implement their strategy and defeat BJP in upcoming elections, it will be nothing short of a ruckus of push/pull government. Virtually, the country will run the risk of re-election every 3 months leading to instability.
We are pretty sure markets will behave like animals running here and there on the street with a weakening bias.
Linking the events to rupee movement below:
- Budget – Socialist – 72.50 to 73.50
- Peaceful distribution of seats among opposition parties – 72.50 to 73.50
- Pre-election exit polls – Hung parliament – 73.00 to 74.50
- Eve of counting votes – Nervousness prevails – 74 to 75.50
- Fractured mandate – 75 to 77