FX Insights: India’s capital markets suffer heavy selling – rupee lower

Spot (mid-market) rate = 71.24/USD (10:00 a.m. ET, February 27, 2019)


Emerging Market (EM) assets and currencies have benefited from the US Fed’s dovish pivot and the reduced volatility seen across financial markets. However, not all EMs have been treated equally by investors, particularly with a backdrop of declining global growth. India’s capital markets have recently suffered from heavy selling by foreign investors in both equities and bonds, helping drive the Indian rupee lower.

Performance: YTD 2019 the Indian rupee has been the worst performer of the Asian currencies

Indian rupee spot returns YTD 2019Primary reasons

  • Uncertainty about India’s general elections in May. Prime Minister Modi’s re-election bid is turning out to be an uphill battle. In a not-so-subtle attempt to win votes, PM Modi just announced a record $100 billion spending plan for their new fiscal year starting in April. Three recent surveys indicate he will not win a majority.
  • Rising geopolitical tensions between India and Pakistan. Last week, a deadly attack on India’s security forces in India’s Kashmir state, the disputed region in the Himalayas, was claimed by a Pakistan-based militant group. PM Modi said the nation will give a “befitting reply” to the assault.
  • The newly appointed Governor of India’s central bank is a dove. In December, the highly-regarded Governor of the Reserve Bank of India (RBI) resigned amid pressure from the Modi government to loosen monetary policy to stimulate the economy. A more dovish governor was appointed, and he quickly cut interest rates by 25 bps. Traders expect another 25-50 bps cut in April. A storm is brewing now over the RBI’s independence from the government.
  • Incredibly shrinking reserves. From a record $426 billion in April, FX reserves have fallen to $398 billion this month, a drop which could hamper the central bank’s ability to defend the rupee in the FX markets.
  • Higher oil prices. India is the third largest consumer of oil in the world, after the US and China. Its estimated oil bill is set to reach $125 billion in fiscal year 2019.  


USD/INR performance chart 2015-2019

Our view

  • India remains one of the fastest growing major economies in the world. Despite the fact that year-over-year growth declined in Q3 2018, India’s economy still grew in Q3 by an impressive 7.2 percent.*
  • If Modi is re-elected, he will likely continue his progressive tax and bank loan policies, which bode well for corporate earnings growth. However, growth may be impacted by India’s high unemployment rate and “shadow banking sector.” The unemployment rate is at a 35-year high, and India’s “shadow banks” focused on consumer lending are deeply under water.*
  • It’s likely that Modi will be re-elected, but that he will not win a majority, so will need to form a coalition government. Nevertheless, I forecast a modestly stronger Indian rupee following the election.

Tactical hedging of INR-denominated expenses: consider using 3-6 month non-deliverable forwards if the USD/INR climbs to 72.00-72.50.

Strategic hedging of INR-denominated expenses should also be considered: our long-term (in the next 1-2 years) view for the US dollar is that it will weaken against all currencies.

Contact us

If you have questions about how the Indian rupee volatility may affect your global business, contact your FX Advisor directly, or email us at fxadvisors@svb.com

Learn more

Read the recent SVB Market Insights and Risk Advisory articles:


*Data source for performance charts and India economic data: Bloomberg 2019 / Reserve Bank of India.

This article is intended for US audiences only.

© 2021 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

Opinions expressed are our opinions as of the date of this content only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. The views expressed are solely those of the author and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates.


About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.