THE mood in India is grim. Despite the best efforts of the central bank and the government, the rupee has now lost about 16% of its value against the dollar since the start of the year. That reflects the global sell-off in emerging markets, but also the dimming of India’s economic miracle over the last two years and the prospect of a messy election, due by May 2014. Opposition politicians are particularly keen to lay the blame at the government’s door. Some investors fear that the upcoming poll will encourage a bout of irresponsible populism.
The historical relationship between the electoral cycle and the rupee is not straightforward. The currency was pegged until 1992. Periodic devaluations took place, but the exact timing was at the government’s discretion. The major bouts of currency weakness in India over the last two decades have also all been associated with global turmoil—the oil price shock of 1990, the Asian crisis of 1997-1998, and the global financial crisis in 2007-2009.
One thing is clear: elections are associated with higher volatility (see chart), perhaps because investors fret about populism. Whether a particular party is associated with a strong rupee is much more difficult to say. The centre-right government of 1999-2004 led by the Bharatiya Janata Party (BJP)—the only non-Congress government to complete a full term since independence—presided over a stable rupee. But global conditions were helpful. When that government lost power in 2004 after a shock victory by a Congress Party-led coalition, the rupee initially tanked. But it quickly recovered.
Is a wobbly currency inevitable around election years? The example of Mexico is useful. Between 1976 and 1994 the peso regularly suffered a massive slump roughly every six years, around presidential elections—even though the country was effectively a one-party state at the time. Mexico tried to create stability by pegging the peso to the dollar in 1988, but by 1994 suffered a full-blown crisis. The pattern of boom and bust was broken only when authorities reverted to a freely-floating exchange rate—but also, crucially, put in place sound monetary and fiscal policies. There is a lesson there for India.
