Tomorrow is an important day as voter’s decision on who forms a new government is announced. We have given three scenarios and impact on INR.
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Scenario 1: If BJP comes with a majority (above 272 mark)
Assuming, exit polls are correct and BJP gets to form the government, investors would cheer the policy continuity. As a result, INR may gain; equity may see fresh high and bonds may see further softening of yields.
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We have compared INR movement during 2014 elections and used those insights to predict INR movement for the next few days. If BJP comes with majority (above 272 mark) INR may once see around 68-68.5 over next 2-3 days and then return to normalcy around 70. Any levels close to 68/68.5, should be used to hedge next 2-3 months imports. In 2014, INR gained by about 3% from the levels seen before exit poll. Extending this pattern and gains of 3%, INR my see around 68.2 (ON exit poll day, it closed around 70.22 and therefore 3% gains means, a gain of about Rs 2/ USD). Please find below day by day analysis.
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Going ahead, we see a surge of capital account inflows in bonds and capital markets. These inflows would guard INR against the turbulent geopolitical environment that we are currently witnessing. In 2014-15, bond inflows increases to USD 27 bn from a negative number of USD 5 bn in 2013-2014. Currently also, FY18-19 had negative bond inflows of USD 4.8 bn and we expect FY 19-20 to post a solid inflow of USD 10 bn+.
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.From a relative strength and weakness standpoint, INR may not afford to de-couple with other Asian and emerging market (EM) currencies. Once, election euphoria is over, INR would come to a level that is in line with peer currencies. The graph below shows the performance of various EM currencies after US-China tensions escalated on 6th May-2019. You would notice that till exit poll date, INR had weakened in line with others like CNY, IDR, etc. Only after exit poll, its performance improved. We expect it to normalize soon.
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Scenario 2: BJP falls short of majorly but NDA forms govt.
INR may see intra-day gains of 50-60 paise and the start to weaken.
INR may see intra-day gains of 50-60 paise and the start to weaken.
Scenario 3. IF NDA fails to form govt
Tomorrow itself, INR may weaken to 70.5/71
*Disclaimer: Best efforts have been made to present the analysis and data as correctly as possible. However, it is prone to errors and therefore clients are expected to do their own analysis, independent of what is shared above, before taking decisions. This is neither a solicitation nor a recommendation to Buy/Sell any currency. No representation is being made that any suggestion being made above will necessarily result into profits and principals/employees/