Trade Turmoil Doesn’t Derail Our Outlook for India

Indian markets haven’t been immune from the struggles affecting emerging markets generally in 2018.

Domestic headwinds include the re-introduction of long-term capital gain taxes (which affect foreign investors), difficulties collecting the goods and services (GST) tax, interest-rate hike concerns and a weakening rupee. Political uncertainty has also affected market sentiment; recent state elections suggest the ruling party may not be as popular as it had been in the past.

Currency Pressures

While the Indian rupee has been under significant pressure this year, we don’t think there are reasons to be overly concerned right now. A global backdrop of monetary policy tightening, elevated oil prices and rising trade tensions triggered capital outflows from emerging markets and supported US dollar strength. Contagion concerns from the recent Turkey crisis have hurt most emerging-market currencies, not just the rupee. We would also point out that the fall in the rupee has been relatively small compared with the currencies of economies with weaker fundamentals such as Argentina or South Africa.

The Reserve Bank of India has intervened aggressively to support the rupee. In our view, there’s room for further intervention even after the recent reduction in foreign exchange reserves.

While a weak rupee makes imports more expensive, Indian companies have been passing on higher input costs to consumers, which has lifted profits, a sign of solid demand. On the other hand, a weak rupee is positive for export-oriented industries and companies. For example, information technology (IT) companies would likely benefit from a weaker rupee since most of their revenues come from foreign countries. With India’s current account deficit widening, a weaker rupee could help the country’s trade competitiveness as India looks to boost exports.