Budget 2019: What will stir Indian Rupee on the D-Day? Forex investors eye this major reform

Countdown has aready begun for upcoming interim Budget 2019 which will be presented by interim Finance Minister Piyush Goyal led by Prime Minister Narendra Modi government. Just like everyone is looking forward to what reforms will take place on the D-day, even forex investors are prepping themselves to place their bet on Indian rupee against dollar on Friday. Currently, Indian Rupee has been trading between 71 - 72 level against US dollar benchmark index at interbank forex market.

Talking about Budget 2019 and its impact on Indian rupee, Sajal Gupta, Head Forex & Rates, Edelweiss Securities Ltd said, "Fiscal fragilities have been weighing both on the currency and debt market space for some time now. Upcoming interim budget will likely confirm government slipping on the budgeted print of 3.3% of GDP by ~0.2%pt to 3.5%."

Gupta said that markets are already bracing for the slippage, largely amid massive revenue shortfalls in GST collections so far. However, all eyes would be on the details of the FY20 budget, as it may be seen as a last policy ditch by the current government ahead of the union elections, and also a precursor to the full budget agenda if the current regime is re-elected. 

For forex market, Gupta says, "We expect markets to remain edgy on the budget day. In the best case scenario, a surprise (and possibly optical) adherence to fiscal consolidation in FY19 and FY20 would likely be viewed positively by the FX and rates market."

However, Gupta also adds that, the sustainability of the market rally will likely depend on the credibility of the revenue and expenditure assumptions for FY20. Continued fiscal consolidation will substantially increase a case for rate cut by RBI in February, which would further support markets.

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Budget is not alone in setting up the course for Indian rupee. There will be some global impacts as well.

On global front, Gupta says, "Not much is expected out of the meeting after Fed having delivered four hikes already in 2018 and also revised down 2019 hikes to two hikes from three in December for 2019. The Fed has already been toning down itself amid the uncertain global economic outlook and shaky equity markets. Recent Fed speeches have echoed data dependency and policy patience."

Consequently, Gupta adds, interest rate futures markets currently assign roughly a 20% probability for a move above the current 2.25-2.50% range for the Fed funds target rate in 2019 and bet at a rate cut as much as a rate hike in 2020. While a dovish Fed has weighed on US dollar since December, swinging risk appetite has generally ensured no sharp downtick for the Dollar.

Considering the above factors, Gupta expects rupee to trade with slightly weaker bias, Range between 70.80 to 71.50 on the Budget day.