Indian Rupee (INR) -3 Questions

M R Raghu
Sunday, May 28, 2017

The Indian Rupee (INR) is surprisingly strong proving many analysts wrong. In a world where emerging market currencies experience decline, the INR has been appreciating steadily. From a low of Rs.68.77/USD in Feb 2016, the INR value is now Rs.64.54/USD. In 2017 alone so far, the INR has appreciated by 5%. Three questions emerge in this context:
1.Why is INR so strong?
2.What is the outlook (medium term and long term)? &
3.What should NRI’s do?

Why is INR so strong?
In my view, there are 4 reasons why the INR currency is so strong.
Firstly the Modi factor. A lot of things seem to be just going right for him so far. His government is mid-way into its first five year term and he seems to be having a positive rating until now. The biggest and boldest gamble in the form of demonetization actually won him many praise from the same people that stood in queue to withdraw money from ATM. His recent budget has been well received. The Goods and Services Tax (GST) harmonizing all indirect taxes is a huge step taken with lot of political will. Finally a string of major election successes especially in Uttar Pradesh and other small wins in Delhi civic polls. Low oil price is the cherry in the ice cream. Modi is emerging to be a credible leader due to which economic and business confidence is moving up. There is clearly a Modi wave at play here.
This brings us to the second reason which is foreign fund flows. On the back of Modi wave and in the last one year, the fund flows have jumped sharply. Fund flows can happen either through FDI’s (long-term and stable money) or through FII’s (short-term hot money). In India’s case, it is more of later though FDI’s have also picked up significantly. While in all of 2016, there was a negative flow of Rs14,000 crores (USD 2.17bn), so far during the first five months of 2017, the fund flows totaled Rs.100,000 crores (USD 15.49bn). Due to this the forex reserves at RBI are at an all-time high of USD 370 billion.
Thirdly, the Federal Reserve of US where after 8 to 9 years of ultra-low interest rates close to zero, the arrival of Trump and his policies are expected to reverse that course and increase interest rates. However, due to growth and inflationary concerns that increase is proving to be slow and painful. When interest rates in US do not go up as expected, money starts flowing out of US into other markets in search of yields. India is a sweet beneficiary in this process.
Finally, the Reserve Bank of India (RBI). With the change in leadership from Raghuram Rajan to Urjit Patel, RBI seems to have grown more tolerant towards a strong currency. RBI has decisively kept away from the Open Market Operations (OMO) leaving the rupee to settle down wherever the market forces decide. In the past such sharp appreciation in the Rupee would have forced RBI to intervene to protect the interests of exporters. Not this time around.

What is the outlook for INR?
At the beginning of 2017, almost all major investment banks had a negative call on INR. Year-end predictions for INR ranged from 70.8 (Barclays) to 65.5 (Mizhou). However, the continued strength of the currency has made many of them revise their forecast which now ranges from 64.5 (MUFG) to 68 (Nomura).
In the short term (meaning second half of 2017), the Rupee will weaken from the current levels if fund flows start to reverse on the back of some bad news on the Indian economy and Modi front coupled with Fed’s resolve to stick to interest rate increases as announced. Both of them look unfeasible as of now. In other words, the near term outlook for Rupee is one of continued strength and can even approach Rs.62/USD.
In the medium to long-term term (beyond 2017), we should be careful in assuming that INR will continue to be strong. Being an emerging market with all attendant problems, the long-term direction of INR is clearly one of weakening and not strengthening. Until and unless the fund flows into India are FDI and not FII, we should be wary of the hot money leaving the country at the blink of an eyelid. Also, the Modi magic will continue only if his administration moves beyond rhetoric and delivers results as promised. Increasing infrastructure, creating jobs and improving ease of doing business can be tough for an economy that languished for so long. Modi will need two or three terms to fulfill the promises not one.

NRI Strategy
The Kuwait Dinar (which is mostly pegged to USD) was quoting at nearly Rs.230/KD during Feb 2016 and is quoting now at Rs.212/KD which is an 8% reduction in value for NRI’s. Obviously the key question in their mind is whether they should wait for the value to rebound or send money now without waiting. Many of the NRI’s have a regular need to send money home. Hence, they will not have the luxury of timing the remittance. However, for those that enjoy this luxury, given the outlook for continued strength of INR for 2017, it may be a good idea to remit now than later. However as they step into 2018, they will have to turn cautious and expect rupee depreciation.

M. R. Raghu, CFA, FRM is the Head of the Research Unit and Senior Vice President at Kuwait Financial Centre MARKAZ.
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Express your comment on this article
Monday, September 11, 2017
In my view, there are 4 reasons why the INR currency is so strong.
Firstly the Modi factor.


Depressed Indian Citizen
Tuesday, September 5, 2017
Firstly please understand NRE have lost the TRUST. since the present government.. Before the INR rupees was 1 KD 235/- plus . Moreover during Ragu rajan (ex RBI governor) the NRE FD interest rate was 9.25 % annually. with almost 14 % yield amd same applies with FCNR US $ was 5.6% annually .and at thaat time US $ rate was 1 US$ .269 Fils to kd . How come it was going fine . Now you tell the present month US $ have gone down to US$ 301.17 becoz of problem in Norht Korea .. still the US$ remains strong .
Please understand by Dec 2017 US$ will push up to .310 approx. Modi govt has wasted our tax payers money by going around begginig for investment where in our Indian economy can be flourished on own skill & developments, The demontiization has given a big blow to a common man especially the street vegetable ,fruit and vegetable market and the household wife expense . where actually the demonitization should be for all politican and bring back all the black money home. Recent RBI news illustrated that nearly 100% of 1000 & 500 notes have been returned why becoz before the demonitization BJP Modi govt already spread the news to his good friends in Antilla & film stars and few industrialists.
I prefer which Congress party are the big loot for so many years but i love them when they scratch my back i scratch them in return both make money to survive .....

Friday, July 28, 2017
Some of the replies are worth read i think...
or else just waste of time.
Article looks like a product of "modi cyber wing"

Parkar A. Kaiyum
Tuesday, July 18, 2017
I don't agree with you...The picture is totally different. Brother tell the Truth whatever it is...As per my observation, since last 4 years our currency deteriorated, if fact, our economy going bad to worst.
Our PM Modi visited almost all countries in the world and he spent huge amounts for it. is it not an additional burden to country? Not yet heard any news about foreign investment...our youth are jobless, farmers are dying ......think???
People in India are suffering lot...we need good quality of leaders to run the Government, be united so we become a strong Nation one day In Sha Allah...Jai Ho.

Mohammed Shams ul Haque
Monday, July 17, 2017
Yet another modi bhagt

Thursday, June 29, 2017
This is more of bakth written article. For those who have the luxury of waiting. Hold till December 2017.

Hary Paul
Thursday, June 8, 2017
Is it really INR gaining strength?
Isn't it a temporary spike in its value?
Those who keep track of INR know it very well that INR has never increased in value for the last 50 yrs. There might be occasional ups and downs but overall strength has decreased with time.
Also, India and all third-world developing countries are benefiting from fall in crude oil price which is also quite significant. India used to shell out US$ 120 billion in 2014 for import of crude oil. Now, India is spending only US$ 65 billion.
Also, economic activities are picking up within India as we have a vast domestic consumer market.
God bless India.

Sunday, June 4, 2017
Noteworthy point:

Both responses so far as only emotional outbursts and logical content is zilch.

Tuesday, May 30, 2017
Apart from praising modi, Replacing raghuram rajan as a positive thing and the demonitisation a sucessful venture .The truth is just the opposite i fear.If we look at history one thing is very clear , when the public keep negative view , the market start to move opposite way .
this is applicable in modern market situation were market is controlled by robots not by human being any more .The stock market movement is nothing but the robots moving opposite to the major short sellers and rupee strenghten also the same move of robotic traders moving against the large pessimistc traders in the currency market created large short position in rupee expecting that it will fall further.
i am just seeing a marketing strategy here may be prior to modi visit in kuwait.Apart from the hype created in media , no real growth story in india .Infact the situation is alarming i fear.

Sunday, May 28, 2017
Dont agree that INR is strong. Infact the currency has deteriorated since 2014 when it was around 63 to a dollar, today its between 68 and 64 which is weak and not strong, so maybe Modi factor has done this which is bad for Indian economy inspite of very strong Stock market. Again KWD to INR was around 217Rs to 1KWD and kept fluctuating infact it was between 220 t0 229 almost all of 2016. So that's also bad sign to Indian economy, INR has become weak due to Modi factor.

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