Will rupee sail through global muddle?

The recent thumping victory of the Bharatiya Janata Party in the Uttar Pradesh election has once again put India in a sweet spot. There was a general belief that the BJP would be able to improve its electoral performance in the state.

However, the astounding victory in Uttar Pradesh is leading to another belief that the National Democratic Alliance will win a majority in the 2019 general elections too. FIIs are pumping huge amounts in both the debt and equity markets. This has led to strong appreciation in the rupee.

Globally, the foreign exchange markets are experiencing steep volatility owing to uncertainty regarding US president Donald Trump’s policies. Trump’s policies could usher an era of global trade wars. Besides, Britain’s decision to leave the European Union is keeping the markets fragile. Brexit’s success is already encouraging other far right politicians in France and Germany to mull a similar exit from the European Union.

This is changing the global landscape. Later this year, France and Germany are heading for general elections. So the global financial markets are expected to remain under pressure due to rise of protectionist policies.

However, domestically picture is once again looking bright after conclusion of recent state elections. The government could again kick-start reforms keeping in mind the 2019 general elections. However, the government could refrain from populist measures. There are expectations that the government may once again initiate a crusade against black money.

The government could bring a new scheme or announce additional measures after the Pradhan Mantri Garib Kalyan Yojana scheme ended on March 31. The government has proposed making Aadhaar mandatory for filing of income tax returns as well as to obtain a permanent account number. Tax evasion would be more difficult given the new measures.

After tdemonetisation, there was a fear that the economic activities might slow down as the GDP growth would decline sharply. However, that has been proved wrong. According to the latest data, GDP grew by 7 percent in October-December quarter of 2016, from expectations of 6.1 percent.

Hence, FIIs have higher expectations from the government to carry out structural reforms. Labour, benami transactions and land acquisition could be next  on the agenda of reforms. The government is giving the final touches to the long-pending GST Bill.

GST bill, once implemented, would replace plethora of indirect taxes and would create single national market. It is expected that GST could add 1-2 percent to India’s GDP growth.

The Modi government is giving greater thrust on its ambitious ‘Make in India’ initiative. The government is giving higher emphasis on the manufacturing sector for job creation. As a part of the initiative, the government has opened the defence sector for private companies. The government is taking measures to increase production of oil and gas in order to cut crude oil imports 10 percent by 2020.

The Centre has announced new hydrocarbon exploration licensing policy which offers single license to explore conventional and unconventional oil and gas resources. The new policy is expected to boost investment in the energy sector as it gives investors freedom in pricing and marketing for crude oil and natural gas.

The government aims to reach the 90th rank in the World Bank’s ease of doing business rankings in 2017-18, from the current rank of 130. To promote investments, the government has proposed to abolish the Foreign Investment Promotion Board (FIPB).

The government is likely to replace FIPB with a simple and business-friendly mechanism. The government has already allowed 100 percent FDI in defence and civil aviation sector.

Globally, crude oil prices have increased, but still remain far below their all-time highs of around USD 147. With the changing dynamics in the global energy markets, crude oil prices are unlikely to move above USD 100 anytime soon. This bodes well for the economy as it would keep both Consumer Price Index and current account deficit under control.

India’s exports have grown by 17.5 percent in February, which is highest since October 2011. Industrial production is also showing signs of revival. Forex reserves are at comfortable levels. Monsoon is expected to be below normal this year, but this is just an initial estimate. If the rainfall is better than the forecast, then it may open a room for Reserve bank of India to ease monetary policy further.

Owing to government’s willingness to take hard reforms and favourable policies, FII inflows are expected to continue in the coming months as well. Domestic factors can offset any negative effects coming out from the global factors. This can keep sentiments bullish in Indian markets. Besides, the Fed’s "guidance" of only two more interest rate hikes in 2017 could support the rupee. Given India’s strong macro-economic fundamentals, the rupee may easily withstand two more interest rate hikes.