Election effect

March 14, 2017

The Kathmandu Post, March 13, 2017

The Nepali rupee rose to a four-month high against the US dollar as the Indian rupee, with which it is pegged, appreciated following a major victory for Indian Prime Minister Narendra Modi’s party in the Uttar Pradesh state legislative assembly election.

The rupee will open for trading at 106.87 per dollar on Monday, up 8 paisa from 106.95 on Sunday, according to the foreign exchange reference rate published by Nepal Rastra Bank (NRB). This rate is the highest since November 11 when the rupee was traded at 106.69 against the greenback.

The central bank has fixed the exchange rate for Monday based on Friday’s closing rate of the Indian rupee vis-a-vis the dollar. On Friday, the Indian rupee opened at 66.73 per dollar, touching a high and a low of 66.56 and 66.73 respectively before closing at 66.61, a level last seen on November 9, according to LiveMint.

The Indian rupee became stronger on Friday as exit polls showed the Bharatiya Janata Party (BJP) leading the election in Uttar Pradesh, India’s most populous state. The exit polls also showed the BJP taking the lead in other state legislative assembly elections except Punjab.

The Indian rupee is expected to gain strength as Modi’s BJP has won a landslide victory in Uttar Pradesh. Victory in this state is crucial because it has a population of around 204 million, or about the same as that of Brazil, and sends more lawmakers to both lower and upper houses of Parliament. Modi’s BJP is also leading in Uttarakhand state.

Indian currency has lately been gaining strength because of a higher inflow of foreign investment in India’s stock and debt markets. Foreign institutional investors, according to LiveMint, bought $1.3 billion worth of equity and $150 million worth of debt from March 2-8. So far in 2017, foreign institutional investors have invested $2.85 billion in Indian equities and $576.70 million in debt markets. This has helped the Indian rupee to become stronger by 2 percent in 2017.

Also, higher factory outputs in India in January are expected to help Indian currency to gain weight. India’s factory output, measured by the index of industrial production, went up 2.7 percent in January against a contraction of 0.1 percent in December, as per the latest data.

A hike in the value of the Indian rupee will automatically result in the Nepali rupee’s becoming stronger.

A stronger Nepali rupee is likely to reduce the country’s import bill because Nepali traders will have to pay less for US dollars in which foreign trade payments are made. This may ultimately reduce inflationary pressure caused by Nepal’s growing reliance on imported goods.

A stronger currency, however, is bad news for recipients of remittance as they will get fewer rupees for their dollars sent home by workers abroad.