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State Elections in India and its influence on the USD/INR Pair

The results of the mid-term state elections in India were released today to the chagrin of economic analysts around the world.  With the next national elections in India slated for some time in 2014, these state elections (as in the US midterm elections) were a prime time to show either a welling of support for the ruling party (The Congress) or a tide change towards the opposition.

From the outset, what  seemed to be a rather simple exercise has turned far more complicated. The results have posed more questions than they’ve answered.  In the important Uttar Pradesh province, The Congress faired poorly.  The regional Samajwadi Party (SP) won the majority that was expected.  Unfortunately, it was thought that the SP would band together with the Congress to form a Government.  The lack of Congress seats won has made such a coalition untenable.  Furthermore, their loss has been seen as the opening for the taking of the Parliament by the opposition Bharatiya Janata Party.

So what does all this mean for the USD/INR pair?

In essence, it all depends on the actions taken by the Congress in terms of economic policy making over the next two years.  Truthfully, they can go either way. If they become far more cautious as elections near and their power is challenged far more fiscal slippage and less reform can be expected.

If on the other hand, they decide to continue on the path of reform (as back-peddling has not paid off in electoral success), the current appreciation of the INR should continue.

Conservatism in the macroeconomic policy area can stall the rally that INR has had against the USD.  There has been a somewhat steady strengthening of the INR since the turn of the year with a slight turnaround at the beginning of this month.  Conservatism and a stalling of reforms within India would surely cause INR depreciation against the dollar.

On the other hand a continuance of reform minded policy would continue the rally as foreign investment would continue pouring into the country.

Stay tuned as the National Budget is released in 10 days and should offer a clearer picture of what is to be expected in the near term future.

USD/INR is trading at 50.65 at the time of writing.