MRG MEGA BERJANGKA
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USD/INR – Gold Restrictions Pose Risks to Indian Rupee if Lifted

Posted By : MRG Mega Berjangka, Mar 31, 2014 – 23:00

Talking Points:

-Indian Rupee (INR) hits highs not seen since last summer.

-Market participants confident on RBI, spring elections.

-Risks remain in the context of gold import restrictions, inflation seasonality.

-Reserve Bank of India at 05:30GMT on April 1st, no change expected.

Over the past week the Indian Rupee has hit highs (USD/INR lows) not seen since this past summer. The Rupee has remained the best performing emerging market currency throughout the EM FX selloffs and in fact is up against the greenback YTD. We have highlighted fundamental arguments that support the Rupee in 2014and although we are seeing multi-month highs on renewed election and monetary policy confidence, near term risks remain. In the context of inflation seasonality that tends to rise in Q2, data is becoming increasingly more important to market participants as confidence may have gotten ahead of itself.

USD/INR News: Indian Inflation Seasonality

USD-INR-Gold-Restrictions-Pose-Risks-to-Indian-Rupee-0201_body_Picture_2.png, USD/INR - Gold Restrictions Pose Risks to Indian Rupee if Lifted

There are a number of factors we can attribute to this rise in the Indian Rupee as of late. Restrictions on gold imports have helped India’s current account recover slightly, although the balance of payments figure remains negative. Earlier in the month we commented that the government would possibly review the import restrictions in March/April and seek to slowly ease those restrictions moving forward. This return to normalcy may prove more difficult than policy makers expect and remains a risk to near term strength of the Indian Rupee.

Two other factors contributing to recent Rupee strength include confidence in the Reserve Bank of India as it sets out to tackle inflation as well as pre-election confidence as market participants front run a strong turnout for the opposition party. These two factors are key fundamental foundations for strength, but confidence may dwindle in the near term as they remain prone to incoming data and election results. As we have seen before,market participants have faded strength post-election as more-of-the-same political results follow. Narendra Modi may be the breath of fresh air that India needs, but the road to victory with sound results is not without obstacles. Those roadblocks provide near term risks for the Indian Rupee.