The Indian Rupee strengthened against the US Dollar after investors were encouraged by the governments move to ease the restrictions on foreign investments in debt markets and as demand for riskier assets improved.
The currency benefitted from the expectations that the Indian government will allow additional foreign inflows into the nation after it agreed to ease restrictions on foreign investors in domestic debt.
Despite today’s gains the Rupee is expected to come under strain as worries over political uncertainty in India begin to rise to the surface. Media reports suggest that another key ally of the ruling coalition government in New Delhi could be about to withdraw their support.
The Samajwadi Party is the latest of the coalition members to threaten to withdraw support. Concerns are growing over the stability of the government as it tries to introduce new economic and fiscal reforms. Corruption is rife in India and some of the party’s are angry that the government has not done enough to tackle the problem.
“The sentiment for the rupee is negative at the moment, considering the political uncertainty coupled with Euro problems,” said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The currency could also be weakened as doubts begin to creep into the Eurozone once again. The Cyprus bailout may be a plaster on a wound but it is not being seen as a bandage. Investors and economists are nervous over what will happen when Cypriot banks reopen, with some worried that a bank run could start and spread throughout the Eurozone. If such a thing does happen then risk appetite will certainly fall.
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