On account of the rising dollar prices, the Indian rupee has been trending down since the beginning of 2018. On May 7, the currency went down to its lowest in 15 months and was trading at 67.13 against the dollar.
The problems of demonetization and GST, which caused a slowdown in the Indian economy in fiscal 2017-18 are over, but the sudden rise in oil prices is indicating a potential increase in the fiscal deficit of the country, which would pull back the government in its scope of social sector spending.
Impact of Oil Prices
Apart from the strong performance of the dollar, another important factor is the rise in oil prices with u.s. crude crossing $70 per barrel. Analysts are expecting oil prices to reach $76 in the near future. As there is uncertainty in the market due to the gradual increase in oil price, the FPI (Foreign Portfolio Investors) has sold off $2.6 billion in the debt market in the past three weeks. As long as FPI continues selling debt, the rupee will continue to perform sluggishly.
Positive Impact for Exporters
Rajiv Kumar, the vice-chairman of NITI Ayog, an Indian government think-tank believes that this event will help the export business to increase at a rapid pace. He is also of the opinion that rupee depreciating will push energy costs higher which in turn will result in lower consumption. The IT and Pharma sectors, for example, have always benefited from a weakening rupee and strong performances by the dollar.
Solid Economic Fundamentals
India's economy is expected to grow by 7.2% in 2018 and 7.4% in 2019 as per a report by UN Economic and Social Survey of Asia and the Pacific. The report also said that once the corporate sector becomes comfortable with GST, infrastructure investments are expected to increase and the financial performance will improve. So with better growth prospects, investments in the ETFs are supposed to increase and a buoyant performance is likely. Presently at $2.5 trillion, India's economy is the 6th largest in the world and is expected to reach $5 trillion by 2025. This will help the upbeat index funds to rise higher and subsequently, ETFs will perform well in that scenario.
