Seasonal weakness, election uncertainty, strong technical support and oil market complications should be more than sufficient to spur an AUD/INR rally into mid-year.
Indian expatriates represent one of the largest groups remitting money from Australia, with some estimates putting Australia-to-India earnings remittances at A$3 billion annually. It is important, therefore, to be aware of a number of factors that suggest higher AUD/INR exchange rates in the coming months. This would be good news for Indians in Australia, who can look forward to earnings increasing in value relative to their home currency.
There are several reasons to favour a higher AUD/INR in the coming months, the first being a strong seasonal tendency for rupee weakness.
It is well known among analysts that the rupee usually loses value every second-quarter (April-to-June) due to India’s heightened gold demand heading into the Hindu festival of Akshaya Tritiya. This partly explains why the Australian dollar shows Q2 appreciation against the rupee in 7 of the past 10 years, and yet, with 5 weeks of this quarter in the books, AUD/INR is slightly down (-1.6 percent) on its April 1st opening level, which demonstrates to at least some degree that the rate is undervalued.
Secondly, at ₹48.5, the AUD/INR exchange rate has reached an important technical support level — a level from which the rate rallied strongly in the Decembers of 2017 and 2018, and which repelled price in mid-March of this year.
Let’s also consider the recent decision by the US to end waivers on sanctions for countries buying oil from Iran (countries like India), which could create quite a storm in the Indian economy. Oil, which is up 36 percent this year and is predicted to climb further, remains India’s largest import and the country’s leaders will now be in a rush to reduce Iranian oil supplies in order to avoid the economy-draining consequences of US sanctions, and this may result in a more expensive import bill.
There’s also the not-so-small matter of this month’s Indian elections, before which political uncertainty will weigh on rupee valuations. A tough election battle is expected for current Indian Prime Minister Narendra Modi, who has overseen an unwelcome rise in Indian unemployment, now at a 45-year high by some measures. Speaking in March, one Radobank analyst predicted a 6 percent decline in the rupee’s buying power if Modi’s Bharatiya Janata Party is defeated.
Of course, AUD/INR is where it is because of the Australian dollar’s own drawbacks. Much has been written in the financial press in recent months about the shift in Australian monetary policy expectations, but the same shift has been seen in India — the Reserve Bank of India has cut interest rates twice this year and is expected to do so again.
For the Reserve Bank of Australia, we’re certainly at the business end now when it comes to monetary policy matters, with a very live chance of an interest rate cut when the RBA meets on Tuesday. At the very least, at the meeting, a signal from policymakers that cuts will be delivered later this year should be expected.
The problem with focusing on RBA policy negativity for FX prediction purposes is that much of this negativity is already priced in to Aussie dollar markets — certainly more than is priced in on the Indian side. Consider that AUD/INR has lost 7 percent over the past 3 months and has fallen in 7 of the past 9 trading days, and similar patterns are present in many other AUD exchange rates. To repeat what was said above when describing seasonal patterns, this demonstrates to at least some degree that the rate is undervalued.
Sure, an RBA rate cut on Tuesday will prompt a knee-jerk breakdown in AUD/INR, but by their nature many event-driven moves are short-lived and investors will know that bets on Australian dollar declines are more likely to pay off if the Aussie is faded against a currency that has something going for it, which can’t be said for the rupee at present.
With this said, an AUD/INR rally back towards ₹52 in the next 2 months shouldn’t be unexpected.