Sea of change in INR currency market

 I am writing this one with regards to a major sea of change that I envisage will happen in the global currency markets. The article below is very counter-intuitive to what has happened in the global markets over the past 20 years but then, as we know, there is always a tipping point in the markets, post which an idea starts becoming a phenomena

Here I am sticking my neck out to say that the EUR-INR or GBP-INR rate has already peaked and from now on Rupee will appreciate against both GBP and EUR. This seems like a strong and blasphemous view but then, there is a logical explanation behind this. It is against the interest rate parity logic and global macro-economic theories, but then theories are always created to explain the phenomenon rather than predict one. Here are the top reasons why I feel so

a.      Increase in investments in the Indian economy

Globally India is becoming a preferred destination for both FDIs and FIIs. This flow of currency leads to greater demand for Indian currency causing an appreciation in INR. Also, INR will be stronger with regards to EUR/ GBP as there is increased preference for India over the Euro zone and UK.

b.      Greater consumerism and demand drivers in India vs stagnation in Eurozone and UK

Greater demand in the economy leads to greater industrial growth and hence a higher demand for goods. This leads to more domestic focus from Indian organizations and also greater interest in FDI investments. Also, higher demand and growth will fuel more competitveness in the organizations in the country which would aid them go global.

c.      Stable to positive economic climate in India

India has one of the highest growth rates in major economies. The reduction in crude oil prices which are likely to stay due to oil glut and better demographics (bigger middle class, more young population), stronger impact of digitization and politics are all pointing towards sustained growth. The stable economic climate will further foster growth in India and hence appreciation in the currency

d.      More drive towards exports and reduction of imports

There is a strong push by the government to rely on domestic companies and reduce dependency on imports. Considering the cost competencies, there is a good export growth opportunity that India is likely to pursue in future.

e.      Poor economic policy and productivity in Euro zone and UK

Euro zone and UK are going through an internal turmoil where there are both political and economic downturns in progress. With issues like Greece and Italy debt meltdown, Brexit and banking crisis in Euro zone looming in, it doesn’t look very promising in Eurozone. Also, the demographics and the productivity information in the Eurozone and UK are going south which will further weaken their currencies.

f.       World looking east

There is a strong push towards focussing on India and China as they are considered to be the global growth engines which will drive the next wave of growth. This would ensure that most companies who are facing stagnation in the west will start making investments in India and hence will auger well for the country.

To conclude, though it seems highly counter-intuitive given history and interest rate parity logic, there is a strong case for an appreciation for INR vs GBP and Euro.