Rupee Struggles as Sitharaman Stays, ETFs Gain $300M

Key Takeaway

• Nirmala Sitharaman's reappointment as India's finance minister signals policy continuity but may not support the rupee amid a strong USD.
• Stocks and India-dedicated ETFs, like iShares MSCI India ETF ($300M inflow), are gaining momentum with renewed focus on pro-growth policies.
• Analysts expect continued fiscal consolidation and infrastructure investment, benefiting sectors like fertilizers ahead of the budget.

Rupee Faces Pressure

Nirmala Sitharaman's reappointment as India's finance minister is seen as a move towards policy continuity, but it may not provide long-term support for the rupee. The broader context involves downward pressure on emerging-market currencies due to a strong US dollar. This trend is also affecting the Mexican peso and China's yuan, as neither the Federal Reserve nor the Bank of Japan's policy decisions are expected to weaken the USD.

Ahead of the recent general election, traders were cautious about the rupee, as indicated by the inversion in the options curve. Although this has mostly been unwound, the spot USD/INR remains near recent highs. India's central bank is moving towards easing monetary policy, with growing dissent on the RBI’s policy committee showing discomfort with the growth sacrifice from its hawkish stance. Bloomberg Economics notes that this suggests the rupee will be caught up in the broad USD/EM narrative.

Market Reactions to Sitharaman's Reappointment

Stocks are likely to gain momentum with Nirmala Sitharaman back as finance minister, ensuring policy continuity. Foreign investors have started picking up shares in the past two sessions. With most key ministers retaining their previous portfolios, it’s clear that Modi 3.0 is sticking to its pro-growth agenda.

Modi’s first task was to approve a 200-billion rupee direct cash handout to farmers, renewing focus on companies linked to the farm sector. Fertilizer makers have seen impressive gains and are set to remain a tactical favorite ahead of next month’s budget. India-dedicated ETFs have also seen significant inflows, with the iShares MSCI India ETF taking in more than $300 million and the WisdomTree India Earnings Fund pulling in about $146 million.

Analysts' Perspectives

Market analysts view Modi’s decision to reappoint Sitharaman as a strong signal of policy continuity. Goldman Sachs notes that the new coalition government kept leadership positions unchanged in most key ministries, which bodes well for continuity of reforms. "We expect the new government to stick to the fiscal consolidation path with a continued thrust on infrastructure creation through more rail network, amidst a slight tilt towards more rural spending," Goldman Sachs economists, including Santanu Sengupta, wrote in a note.

Nomura Holdings' economist Sonal Varma stated, "Investors were very fearful of the compromises the BJP would have to make" after being forced to form a coalition government. With Sitharaman’s reappointment, the focus on infrastructure and continued fiscal consolidation should also continue. Deven Choksey, managing director at DRChoksey FinServ Pvt., said, "She has done a good job of focusing on priorities and has the clarity on what needs to be done."