Rupee rally unlikely to last

The 3% rise in the rupee against the US dollar so far in March has left it at its strongest rate since August, and means it has outperformed all other major EM currencies this month. This is related in part to recent opinion polls showing that the ruling BJP is on course to win the general election which starts in April. Looking ahead however, we doubt that the rally in rupee has much further to run. For a start, concerns about the independence of the Reserve Bank have by no means been put to bed and could be reignited if the MPC continues to cut interest rates as we expect. Meanwhile, we think that slower growth in the US will cause the S&P 500 to slump and investors to retreat from risky assets generally. We think the rupee will drop to 75/$ by the end of 2019, from around 69/$ currently.