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Indian Confidence: An Opportunity

02 Oct 2014 12:57 BST · Time Estimate: 2 minutes ·

When it comes to currency crosses, the usual suspects of the dollar, euro and yen are always sharply in focus. The attention afforded these power exchanges means lesser-traded currencies often remain out of sight. Such currency pairs – which may or may not contain a major currency – have less liquidity and demonstrate more volatile behaviour due to their lower trading volumes and are therefore regarded as riskier trades.

Prime Minster Narendra Modi

Indian PM Narendra Modi (pic courtesy of Reuters.com)

Occasionally, however, an obscure currency pair can build into a hopeful trading candidate for traders, particularly if there are notable changes in the economies of either of the involved currencies. Take, for instance, the intriguing trading opportunity pair of the US Dollar and Indian Rupee.

USD/INR 40 Percent Price Increase

Barchart of USD/INR

In the 18 months between Feb 2012 and Aug 2013 this currency pair provided forex traders a real opportunity as USD appreciated by nearly 40% against the Indian Rupee. Volatility has since set in however, and USD/INR has been trading with significantly lower volumes (around 7% with low volumes in the last 12 months).

This range bound pattern has been attributable to the Indian economy stagnating and the country’s elections taking place. But with a new government now in place, headed up by Mr. Narendra Modi, there is renewed optimism. Mr. Modi has a track record of rapid economic development and the political change has not gone unnoticed by global investors who see a major uplift to India’s economy and, ultimately, its currency.

Add to this the fact that the US economy is strengthening with every passing day, the USD/INR currency pair will soon start to be of interest to many forex traders again. Interestingly, the US has recently topped the list of highest contributors to the rise in global equity market capitalization; a list that sees India ranked second ahead of China. Although, India’s contribution is only 10%, its own equity market cap has increased by 36% prompted largely by the ever-increasing acceptance of online stock broking.

Equity investment is a sure sign of growing investor confidence in India’s future economic prospects. Further analysis of how the USD/INR currency pair will move is key, but the likelihood is that trading volumes will soon increase and this currency pair will be back firmly in the spotlight.