INR has been one of the most stable currencies in last 2-3 years especially during a time the world currency market has been in complete turmoil. But INR History over last 7 years totally different...
Let's look at the Journey of USDINR from CY 2010...when President Obama visited India and India was considered a big success story
This is USDINR chart and upside move in the chart means depreciation in INR
What happened between Nov 2010 and August 2013?
INR depreciated by 30%+
USDINR had built a solid base at 44 and was extremely stable for a good period of time...but there were two things happening below the surface: Inflation was picking up pretty aggressively and the country was witnessing one corruption scandal after another. There was a total political leadership vacuum, BJP was in disarray and Anna agitation had picked up significant momentum. The country looked bad optically and currency market took notice and USDINR depreciation took off and in a matter of 2 years - INR depreciated by 31% and inflation problem went from bad to horrible. Gold became the fav asset class because one could see the depreciation gains in the prices of Gold.
Buying Gold may still be profitable if Indian economy gets screwed and INR falls AND as more Gold you buy...more economy will get screwed
— Deepak Singh (@smarket) March 4, 2013
The Problem went completely out of control in August 2013..that people started even talking about this
WHAT " @sandipsabharwal: Some Hedge Fund has apparently bought options on the INR going to 100/$."
— Deepak Singh (@smarket) August 16, 2013
Then two things happened in September 2013:
1. Raghuram Rajan became RBI Gov and he declared war on inflation
2. Narendra Modi became PM candidate of BJP and assured Strong Leadership
Both major problems looked solvable i.e. Inflation and Absence of Political Leadership then, and the market started discounting it. The USDINR from 69 (August Panic) tumbled to 58.5 by May 2014 (Modi Victory).
Post Modi Victory, the market started discounting the economic fundamentals and the challenge Modi had to face. USDINR started depreciating again and It was not surprising
I don't think INR can appreciate from here. China is aggressively depreciating its undervalued currency. India cannot afford appreciation
— Deepak Singh (@smarket) May 19, 2014
During middle of 2014 - another interesting development happened: 1. Massive Rally in USD index; and 2. Complete collapse in Crude prices. The 2nd factor helped India weather dollar strength pretty impressively. But over last two years - INR had to go through several moments of nervousness especially one that came early this year because of the banking crisis (bad loans). USDINR again touched 69 panic high but then quickly came off post budget, thanks to positive policy measures both from RBI and Central Govt.
THE ROAD AHEAD
The Currency is a means to an end and not the end itself. The level of currency does not matter, what matters the objectives Govt wants to achieve. During 2013: INR level of 67-69 was a source of panic because Inflation was high and currency depreciation meant more imported inflation. But today, when inflation is in control and Govt wants to create manufacturing jobs, it cannot afford to have expensive currency because that will discourage people from setting factories in India, especially when China is depreciating its currency like this. This is USDCNY chart
What does this mean for India?
Policy makers will continue to pursue stable currency policy. USDINR has built a solid base at 66 and policymakers will like to see INR trading in 66-69 band and if FII inflows continue like crazy, they might allow it to appreciate to 65 - the long term moving average support. So, fundamentally, USDINR should trade between 65 and 69.
If USDINR depreciates below 69 OR appreciates above 65 for any reason, then flood gates will open and you can know that a big move is coming.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers