- Created: Monday, 22 September 2014 14:55
If you were wondering what it will take for the rupee to break out from its sideway movement and for the Nifty to recover from early-2014 losses, Modi is your answer. The more it became apparent that the Gujarat Governor would become the next Prime Minister of India, the stronger the rally of Indian assets.
Interestingly, Modi has displayed a willingness to work with the other keyman of India’s cog-in-the-system: Reserve Bank of India Governor Raghuram Rajan. There were initial fears that Modi may clash with Rajan because Modi, who is pro-business, would like a weaker rupee. Rajan, however, has made it extremely clear that his top priority is to combat inflation – and the quickfire way to achieve that goal is a strong Indian currency. Modi, thankfully, has also made battling inflation his top aim – and he has made good his word, by imposing export restrictions on certain food commodities.
Speaking from the point of an economist, we would really like to see solid economic reforms from India’s new government that could potentially usher in a new era of strong emerging market growth. India is as complex as it is problematic; yet, one cannot deny the huge economic potential it possesses. Efforts to reduce government red-tape, increasing productivity, raising education standards and of course, safer laws for women will be strong steps in the right direction.
Rupee Outlook: The euphoria appears to be fading. One month ago we were pretty confident that the rupee would continue strengthening, but we were always of the opinion that the rupee has to weaken in the longer run. The rupee trended between 61 to 64 per dollar for the better part of 6 months – with no clear improvements in the Indian economy nor the US economy, the rupee should remain status quo in this range. The run of the rupee to near-58 was slightly unwarranted and the position is now unwinding.
The Nifty Index: The Nifty is at an extremely lofty height and it looks extremely toppish. Technically speaking, weekly RSI has crossed 70 for quite some time now, indicating “overbought” status while the index is starting to fall off the upper Bollinger band. This could be the start of a downtrend. However, the P/E ratio of India stocks remain relatively cheap – at 15.3, it is roughly about the same as Thailand’s. The cheap valuations of Indian stocks should give it some support. Using retracements, the Nifty is likely to find support at 7,065 and 6,872.