The Indian Rupee has been moving in a positive direction this year. This means that if Rs.68 (approx) would give you 1 dollar in November 2016 today Rs. 64 (approx) will give you 1 dollar. Wow, right ?Let’s find out, how this happened.
So a lot of good things and bad things have happened since 2016. All these are inter linked to our economy and in some way or the other contribute to the strengthening or weakening of the Indian Rupee.
The Indian Rupee which was Rs. 67.90 against the dollar towards the end of 2016 has now gone up to Rs. 64.20 against the dollar today. So what are the reasons for this?
Increased Growth in Domestic Institutional Investors:
Okay so up until 2016, in the Indian markets, foreign portfolio investors always outnumbered domestic investors. Reasons for this could probably be lack of investor knowledge, less faith in the markets, lesser confidence, not too much exposure to the markets, lack of sophisticated investment avenues like SIP etc. But investor confidence is building and this year after almost 7 years domestic investor participation is more than foreign investor participation
According to experts funds from domestic institutional investors (DIIs) are becoming more stable because of increasing SIP (systematic investment plan) investments and rising flows into National Pension Scheme and the Employee Provident Fund Organisation (EPFO).
Increase in Foreign Institutional Investors and Foreign Direct Investment:
If a specific country is stable, shows consistent & positive returns over time, has scope for development and is backed by strong economic & political factors then obviously people will get attracted to that country. It is like an amusement park, the scariest ride however scary is popular because it gives promising adrenaline rush! So even though you feel India is a developing country, has the 2nd largest population, has lots of corruption etc. it still is the world’s fastest-growing large economy, having outpaced China even!
Foreign institutional investors (FIIs) have now become buyers in Indian markets after consecutively selling. In February, they bought Rs. 10,485 crore of equity into Indian markets and Rs 5,980 crore into debt markets. In March too,this number grew further showing their confidence in India’s economy. Even foreign direct investment in India has seen growth in services, telecom, trading, computer hardware and software and automobile sectors. The Budget 2017-2018 announcement by Finance Minister has further helped in attracting foreign investors. This inflow of foreign investments in India helps improve the country’s balance of payments situation and strengthen the rupee value against other global currencies, especially the U.S. dollar.
A stable, people friendly government translates to a strong economy. PM Narendra Modi is expected to intensify his reforms process and after the G.S.T., he is likely to introduce more reforms for the retail sector, for labor laws, for cleaning up bad debt at banks, reforms for financial inclusion, reforms for digital transactions etc. Implementing the pending reforms will only strengthen global confidence in India. With BJP occupying power in more states, investors are likely to grow more confident in India’s growth story and pump more funds into economy which will make the market and consecutively the rupee stronger.
After Donald Trumps victory in the 2016 presidential elections, the dollar has been falling. The Federal Reserve’s announcement to increase interest rates has not helped their case and the dollar is falling further. This increases confidence in Indian markets, and a reduction in our fiscal debt, which makes the stronger rupee.
Apart from all this falling oil prices, growing equity markets (Remember when Nifty hit 10,000), and BJP’s victory in UP elections, are also responsible indirectly and directly in a stronger rupee.
The economy is like a web, everything is interconnected. A stable government means strong economic reforms means strong participation in Indian markets means strong investor confidence from foreign companies means strong markets means strong rupee means strong markets again and that’s how everything is co-dependent.