Skip to main content

Advertisement

5 Divident Stocks T0 Own Forever
This Could Signal Doom for the Indian Rupee Forecast in 2017 Lombardi Letter 2022-11-29 15:36:23 Indian rupee forecast Indian rupee outlook USD to INR exchange rate USD to INR outlook Demonetization India GDP rupee dollar cashless economy Indian Reserve Bank Indian government 500 rupee banknotes 1000 rupee banknotes India's demonetization policy has caused a gloomy Indian rupee forecast for 2017, with the USD to INR outlook looking decidedly bearish for the rupee. International Markets https://www.lombardiletter.com/wp-content/uploads/2017/02/Indian-Rupee-Forecast-in-2017-150x150.jpg

This Could Signal Doom for the Indian Rupee Forecast in 2017

Indian Rupee Forecast in 2017

Indian Rupee Forecast Takes a Decidedly Bearish Turn

At present, the U.S. dollar to Indian rupee (USD to INR) exchange rate stands at 67.2040 rupees for every dollar. Recent rumors suggest that the Reserve Bank of India will tackle inflation in 2017. This has led many to expect a bullish Indian rupee forecast for 2017. But, while the rupee could eventually gain against the American currency, it will take at least a year before this happens.

In other words, in the short- and medium-term, the USD to INR outlook is decidedly bearish. Only in 2018 will the Indian rupee forecast take an optimistic turn. For 2017, most expectations are for the USD to INR exchange rate to move toward 71 (that is, 71 rupees for every dollar) or even 72. (Source: “Indian Rupee Forecast 2016-2020,” Trading Economics, last accessed February 2, 2017.)

Advertisement

5 Divident Stocks T0 Own Forever

India’s economy could experience considerable turmoil in 2017. The Indian government launched a rather brutal demonetization program in November 2016. Last November 8, it removed the 500- and 1,000-rupee (about $14.85) banknotes from circulation. But this amounts to 86% of India’s monetary circulation money.

The demonetization has disrupted the daily lives of the population, curbing household consumption. The general intent was to rein in the black market and “grey” economy by limiting cash transactions. By cutting spending, inflation has also dropped to 3.6% from about 4.2%. This should have determined a bullish Indian rupee forecast.

But, such is the importance of cash to the Indian economy, that the lower inflation won’t help boost the currency. Indeed, the Reserve Bank of India could be able to lower, rather than lift, interest rates, pushing the USD to INR exchange rate further in favor of the dollar. India is not interested, for that matter, in boosting the rupee.

While China gets most of the economic growth miracle limelight, India’s economy has been growing just about as quickly. India wants to keep that growth at the current 6.5%. A higher USD to INR outlook would be bad news.

Indeed, the demonetization program will have hurt the informal economy. Therefore, the government must sustain the “formal” one in as healthy a shape as possible to absorb the demographic shift that a simple removal of banknotes can have in India.

The removed banknotes are those most used in the shadow economy and in rural areas. Moreover, these also happen to be easily falsified. Forgery of the rupee is a major problem for India. In fact, the Indian currency is the ninth most counterfeited currency in the world. Counterfeiters use criminal networks in Pakistan, Nepal, Bangladesh, and Dubai to print and import them to India.

India’s Economic Growth Will Continue, but Rupee Will Remain Under Pressure

In the long term, the Indian government’s demonetization should help improve the Indian economy—or its more “formal” representatives. Forcing more people to use banks will bring India’s rural areas closer to the fold of the global economy. The government will also have more tools to fight tax evasion and corruption.

Of these, the most important goal of the program is to encourage Indian citizens to deposit their savings in banks, to reduce the large shadow economy over which the state can not extract taxes. But the speed with which the government launched the measure has caused problems for the population. It will also affect actual economic growth.

People have protested the government’s decision; many found themselves overnight without money for daily expenses. Those who were patient enough to wait had to join long lineups outside the banks; there simply weren’t sufficient quantities of the substitute banknotes to satisfy the demand. Worried, many Indians charged ATMs, worried they would not be able to exchange their notes.

The cancelled banknotes (500 and 1,000 rupee banknotes representing 86% of total circulating cash) amounted to the equivalent of $44.0 billion. That’s about a quarter of the total Indian cash supply. To fully grasp the effects, consider that in the Asian sub-continent, inhabited by 1.2 billion people, only about two percent of the people have a credit card.

Cash transactions account for 78% of the total. Thus, the impact of the “demonetization” will be a shock to the overall economy. But it’s not just consumers who have suffered, of course. Evidently, retailers have endured a significant slump in sales. Moreover, all kinds of businesses have complained that they had insufficient cash to proceed with ordinary production.

They had no cash to buy raw materials. Grain producers lack the cash for planting crops. This means that “futures” will also be affected. The results of the demonetization chaos will last for weeks, if not months.

India was slated to become the fastest growing economy in the world this year. The government’s demonetization program has stopped that. India could still perform to remain the world’s fastest growing economy, but the growth rate might be lower than expected. By most accounts, including the International Monetary Fund (IMF), the slowdown of what is Asia’s third-largest economy will be temporary.

The government estimates that real gross domestic product (GDP) will remain between 6.75% and 7.5% in the 2017–2018 financial year, starting next April 1. Even this outlook is still is considerably optimistic, because there is the impact of higher oil prices to consider as well. It’s more likely that the Indian economy, which started the year at a 7.6% GDP annual rate will drop to sub-seven percent rates. (Source: “India’s budget to balance growth, fiscal restraint as Modi’s cash curbs dent economy,” CNBC, January 30, 2017.)

Lower Inflation Allows for Low Interest Rates, Putting Pressure on USD to INR

The lower inflation will allow the Indian government to keep an accommodative monetary policy. The Reserve Bank of India will use it to stimulate investors’ appetite for all aspects of India’s economy, including the stock and bond market.

This is quite a departure from the past five years or so. At the start of 2013, the USD to INR exchange rate was 22% stronger for the rupee. But in 2016, this started to change and the bearish course for the rupee should accelerate in 2017.

India’s forced and rapid digitization of money will move millions of people to start using electronic payments almost overnight. In theory, as noted above, encouraging more Indians to use banks should help economic growth in the long run. But the way the process has been handled suggests that economic growth projections might be overly optimistic.

This is because the way demonetization has been managed has proved to be rather disastrous. The government has failed to replace the old notes with new ones. ATMs have yet to be configured for the new rupee banknotes which, unbeknownst to everyone except the person who designed them, are of a different size.

The Impact on Business Was Brutal

Commercial activity in India was interrupted. Obviously, withdrawing 86% of the banknotes in circulation in an economy where 80% of the transactions occur in cash could not happen without some pain. In rural areas, most people do not have access to ATMs, and many still do not have a bank account.

Thus, many people were forced to go to the nearest cities to deposit their money in the banks and try to get funds to replace the demonetized banknotes. The gold and real estate sectors may have suffered the most. These are the sectors that typically run on “undeclared” money. Real estate purchases feature large sums in cash, while the construction industry itself runs on cash.

Why is that an problem? The new banknotes don’t work properly with many existing ATM machines! Therefore, the immediate result of the cash struggle in India could be a sharp deceleration of GDP growth. In fact, it’s enough to cast a cloud over global growth.

Not everybody is concerned. Microsoft Corporation (NASDAQ:MSFT) bossman Bill Gates will surely have applauded the Indian government’s anti-cash measures.

Gates has long been an enthusiastic backer of the very sort of measures that the Indian government has adopted. He argues that it won’t be long before the world will be free from cash, going toward full digitization. A cashless society, say its proponents, would bring down costs and thus relegate inflation as a relic of the past. (Source: “Bill Gates Promotes Cashless Society To Third World Countries,” YourNewsWire, January 23, 2015.)

The move to reduce cash dependency will also affect employment. Businesses like rickshaws and other informal transportation methods use cash. Many will have to adapt to taking digital transactions, and some already have. But private investment will drop everywhere.

Construction is the sector that creates the highest number of jobs in the Indian economy. (Source: “How Will Demonetization Affect Business in India in 2017?,” Wharton University of Pennsylvania, January 5, 2017.)

There is every reason to expect a fall in real estate prices in India. There is every reason to expect a significant decline in activity over the next two quarters. Real estate values have already fallen some 30%. (Source: “Demonetisation: Housing prices to drop up to 30%, wiping Rs 8 lakh cr in value,” Firstpost, November 24, 2016.)

They could drop further still.

Therefore, as for the USD to INR forecast, the rupee could be headed for a major slide in 2017. India has some structural problems that this economy has dragged on for some time. Rampant corruption is one of these, and that’s why Prime Minister Narendra Modi has tried to intervene in a heavy way. His decision taken to withdraw 500 rupee banknotes  and 1,000 rupee banknotes (the most widely used) must be seen as an effort to nip the black market economy in the bud.

The decision has caused many controversies and problems, but the Indian government remains stable, and economic growth (as measured by GDP) will continue at a strong pace, even if it is 0.5% to one percent lower. Ultimately, the USD to INR outlook is bearish for the rupee. The Reserve Bank of India will stimulate investment as much as possible, keeping rates low and keeping pressure against the rupee.

Related Articles