Mighty Modi And The Rupee Machine

The Rupee is finally taking a breather and it is because of Iraq and maybe Ukraine. Modi’s uproarious win is put on the back burner as profit taking tempers the Nifty’s post election rally

The Indian rupee takes cues from a few important ingredients – commodity prices (including onions and their great shortage a few months back) which really equates to inflation and their current account deficit.

With agriculture forming 1/6 of the total GDP and food, beverages and tobacco taking up 50% of the CPI basket, I say RAIN is very important to India and the monsoon season is a closely watched affair.

The latest news is that the monsoon will be sub standard this year with 55% of the country’s farmlands to get below normal rainfall that would risk driving inflation higher in the months ahead especially if this year’s monster El Nino robs India of more rain.

And fuel costs which comprises 10% of the CPI basket, is looking higher at the moment because we have no idea what is happening in Iraq and how ISIS (Islamic State In Iraq) managed to become the richest terrorist group in the world by stealing 450 million dollars from a bank (and which bank carries 450 mio in their vaults ?)

The good news is that all these are short term fears.

Over dinner, an Indian investor friend of mine gave me his take of the situation. This is after his hugely profitable run last month on the USDINR, INR bonds and credits, delivering returns in excess of 15% for his portfolio.

1. After 10 years of messy politics, India has finally found a stable answer
2. Opposition parties are scattered and cannot even form a coalition
3. Indians are prepared to stick with Modi for the long haul ie. 5 years or more
4. There are huge cash piles waiting to be invested and middle class explosion continues
5. Asset prices are waiting to be revalued and India has a beautiful population pyramid to be exploited
6. Infrastructure projects will see kick starts after being held behind by a decade of political wrangling7. Modi will welcome foreign investment back into the country

These are all signs of capital account inflows, if you ask me, that will help in funding their structural budget deficit.

“Modi faces the challenge of cutting fuel subsidies, allowing more foreign investment and pushing through projects that had been stalled due to delays in approvals. He campaigned on his record of delivering economic growth as chief minister of Gujarat state and promised to stem consumer-price gains. ”

It is also not true that only Indians and Non Resident Indians are the lucky ones to be able to benefit from the Indian revival story.

INR can be bought on a Non Deliverable Forwards basis in forex accounts, a INR US ETN (exchange traded note) as well as INR currency future traded on the SGX and in the Dubai Gold & Commodities Exchange.

I believe currency exposure is key in the long term and carry is secondary. Indian bonds are available to investors subject to FII (Foreign Institutional Investor) quotas and a tad arduous for non Indian retail investors to partake.

It is not too much to expect in the medium to long term  for USDINR to retrace back to its former glory days of sub 50, last visited in 2012.


Trade : Sell USDINR at 61, target 57.50 for starters.

Yet we can only expect more good things to come as the country opens up on a single key man – Mighty Modi.

Because the expectations are realistic this time. After 10 years, the country is at its lows as my friend expressed. The new regime may have a shaky start, there will still be corruption but perhaps less of it and there will be a lot of patience this time round for them to get it right.


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