The world of forex is undergoing a rapid evolution. In recent years forex reflected the interplay of three major currencies: the U.S. dollar, the Japanese yen and the euro. The emergence of China as a significant player in world trade added a fourth element, and most recently India has emerged as a fifth force in the currency world. Palaniappan Chidambaram, India’s finance minister, announced India’s intention to transition its currency, the rupee, to a fully floating and convertible status; 1 rupee = $0.0224143.
The addition of the rupee to the basket of major currencies provides an exciting new component for forex traders to consider. First, let’s review some fundamentals, because the future value of the rupee will reflect the economy of India.
We see the significance of the emerging post-socialist Indian economy everyday. Capital is flowing to India from its outsourcing services. Dell computer recently announced its intent to double its workforce in India to 20,000 people within three years, and Deutsche bank is moving 2,000 positions to India, more than one-half of its sales and bank trading support staff. Even the dominance of the most recognizable U.S. exports — movies — is being challenged by India. The animation in movies such as Shrek 2 and Spiderman 2 was performed in Bombay, which has been dubbed Bollywood by some. The result of having an outstanding talent pool at half the cost is a GDP growth rate that is near 7%.
While a great deal of attention focuses on China’s more than 10% annual GDP, it is useful to remember India has a modern legal system and banking structure, key to its global competitiveness. India is fifth in the world in GDP purchasing power. The lack of a free-floating currency has made India less competitive. Although managing its currency allows a country to manage its economy and maintain stability, such a policy comes at a great potential cost.
Efficient economic performance requires a capability to freely move capital where it is wanted. India is in a new wave of liberalizing and globalizing its capital markets. For example, the Mumbai-based multicommodity exchange will be listed on the India bourse. Realizing the need to integrate into the global economy, India has announced a serious intent to allow the rupee to move from a non floating currency to a floating regime. And whereas China’s begrudging commitment to eventually float is the result of U.S. pressure, there is reason to believe India’s commitment to float is more meaningful.
Of the many arguments made by economists against a free-floating rupee, one is the likely volatility it will introduce and potential outflow of capital from India. Nevertheless, the prospects of trading the Indian rupee are an astounding potential for India and for the forex industry. Today Indian citizens can trade forex in foreign accounts with a limit of $25,000. Consider this: With a population of more than 1 billion people, the Indian middle class approximates 300 million people (more than the U.S. population). That’s a big target group that has the capability to trade forex! How then should traders get ready to trade the rupee?
First, brokerage firms are certainly gearing up to provide brokerage services to India. They will greatly benefit by developing and delivering forex education and training products. Successful forex trading even in major currency pairs requires training in both fundamental and technical analysis. A floating Indian rupee will likely be more volatile as the market establishes stable liquidity and volume. The floating rupee will also enable combinations of pairs not yet possible, such as a INR/AUD and INR/JPY pair. The addition of the rupee will create multiple pair opportunities.
When the rupee does float it will provide a major new dimension to forex trading. For those looking to participate in rupee trading, it is not too early to start learning.
