The question is whether the worst is finally over for the INR

The last few weeks have been positive for the Indian rupee which recovered from an intraday low of Rs.75/$ to a six-week high of Rs.71.95/$. The rupee has shown tremendous strength on the back of falling crude prices and reducing fears of a global slowdown.

Crude prices and global growth

Brent crude fell sharply from a high of $86/bbl to $66/bbl in a span of fewer than 6 weeks. On the one hand, the Iran concerns over sanctions have almost come to zero after the US relaxed sanctions on key importers like India, China, Korea, and Japan. On the other hand, the IMF had originally warned about slowing growth due to the trade war. That does not seem likely with the global markets expecting an earlier rapprochement between the US and China. That means the pressure on the Yuan and the rupee is not likely to happen in the near future. That should work in favor of the dollar.

Macros are improving

But the real takeaway for the rupee is that the macros are actually improving in India. Let us take three aspects of the macro. Firstly, inflation came in at 3.31% for October and that is well within the RBI target of 4%. Contrary to fears that the MSP could be inflationary, the impact of higher food prices is almost zero. Secondly, the green shoots of growth are back. GDP is expected to touch 7.8% in this full year. But more important this quarter had corporate top lines growing by 22%. Profits grew at just about 11% due to input cost pressures. Finally, the trade dispute and the lower crude prices mean that the trade deficit and the CAD going out of control is not necessarily a risk at this point of time. The strong rupee may be actually celebrating the silent shift in the Indian macro story. With crude topping out and rupee bottoming, the worst fears for the Indian economy may be over. That may be the good news!