USD/INR forecast: A majority for BJP-led NDA would be positive for Rupee, but upside limited

  • Exit pollls show a clear majority for the incumbent BJP-led NDA. 
  • Post-election INR appreciation will likely be short-lived, according to historical data. 
  • A BJP defeat could prove costly for Indian assets. 

Indian Rupee and stock markets have picked up a strong bid in the run up to the election results, due this Thursday. 

The Sensex rallied 1,422 points on Monday – the biggest single-day gain in over a decade, while the Rupee gained 70 paise against the greenback. The Indian assets are expected to trade on the offensive ahead of election results, as exit polls have unanimously predicted a clear majority for the ruling party and continuation of the pro-business Narendra Modi-led government. 

Put simply, expectations have been built that the incumbent government will be elected with a clear majority. That has left the doors wide open for a sell-off in Indian assets if the results contradict the exit polls. 

Scenario I: BJP-led NDA gets a clear majority

The USD/INR pair will likely see big losses on Thursday only to bottom out in the next week or two if the BJP-led NDA gets a clear majority as expected. 

It is worth noting that the BJP victory is being priced in since the end of February. Back then, the INR was trading 71.50 and fell to a low of 68.30 by mid-March. Had oil prices remained flat to negative, the INR would have appreciated further. So, the Indian currency could lose ground on “sell the fact” trade if the outcome of the elections is in line with the exit polls.

What does historical data indicate?

Supporting that analysis is the historical data, which shows the INR had witnessed a similar “buy the rumor, sell the fact" trade in 2014.

The Rupee had appreciated from 63.50 per US dollar to 59.36 in four months leading up to the election results on May 16, 2014. On that, USD/INR fell 1.52% to 58.46 and extended losses further to 58.16 on May 22 before turning higher. By December 2014, the pair was trading at 64.30. 

Also Rupee had gained 4.4%, 0.10% and 0.4% in one-month following the conclusion of voting in 2009, 2004 and 1999, respectively. 

All-in-all, the USD/INR could drop to 68.00-67.50 before turning higher. 

Scenario II: Coalition government

As noted earlier, expectations of a clear majority for the BJP-led NDA have been built in the markets. So, anything less than that could put pressure on the Rupee. 

USD/INR will likely rise above the recent high of 70.78 in the short-term, reviving the bullish view put forward by the falling wedge breakdown, confirmed last week. 

Scenario III: Congress-led UPA win

This is the least likely outcome, as per the exit polls. Markets haven’t even considered the possibility of Congress-led UPA victory. Indian assets, therefore could take a beating if the BJP is ousted from power, leading to a near 90-degree rise in USD/INR, possibly to new record highs. The panic, however, could be short-lived, as empirical data suggests the foreign institutional investors (FIIs), irrespective of who the Prime Minister is, do not sell Indian assets. That behavior will likely continue amid the ultra loose monetary policy in advanced world and with India’s high yield.

Weekly chart

As seen above, the pair closed last week at 70.42, confirming a falling wedge breakout – a bearish-to-bullish trend change. So far, however, the follow-through has been bearish, courtest of exit polls. The currency pair may drop to the 100-week moving average (MA), currently at 67.67, if the election results are in line with the exit polls. 

The falling wedge breakout would further gain credence if the spot rises above the previous week's high of 70.78, which looks likely if the Congress comes out vicctorious or a hung parliament forces the BOP to form a coalition. A break above 70.78 would open the doors to retest of record highs above 74.00. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD tumbles to five-week low on rising US yields, energy crisis

EUR/USD has tumbled below 1.17, hitting the lowest since August 20 as Europe struggles with soaring gas prices and China suffers power cuts. Fed Chair Powell is set to testify and comment about the bank's recent taper signal. 


GBP/USD drops below 1.3650 amid firmer dollar, energy crisis

GBP/USD is extending the drop below 1.3650, undermined by the US dollar's strength and the UK's fuel problem. The British army is on standby to mitigate fuel shortages. The pound ignores the hawkish comments from BOE Governor Bailey. 


XAU/USD eyes $1730 and $1727 as next downside targets

Gold is off the lows but remains vulnerable amid the underlying narrative the Fed could announce a sooner-than-expected rate hike, as the TIPS market has also started pricing in higher future inflation. 

Gold News

Crypto markets prepare for a bullish October

Bitcoin price shows signs of bullish breakout as it traverses a falling wedge. Ethereum price also displays an optimistic outlook as it forms a descending parallel channel.

Read more

Conference Board Consumer Confidence Preview: Unhappy but still spending

The collapse of consumer optimism in August has not exacted the expected toll from American spending, the most important factor in sustaining the US  economic recovery. August’s confidence reading at 113.8 was the lowest since February.

Read more