Delighting in the results of last week's state elections, the stock market by Monday had surged by nearly three per cent. The rupee, too, rallied strongly and was up by more than two per cent, which was all the more impressive since over the weekend the US employment figures pointed to a stronger economy and possibly earlier tapering by the United States Federal Reserve. Clearly, investors, both domestic and global, believe there is a new dawn ahead for India.
Some of this euphoria certainly has to do with the belief that the Narendra Modi-led Bharatiya Janata Party (BJP), which is reputed to be more market-friendly, will be able to easily trample the dying remains of the Gandhi-parivar-led Congress party, and we may well finally have a government with a mandate.
However, the real game-changer is not the BJP victories, but the coming of age of a truly new India reflected in the morality behind the Aam Aadmi Party (AAP).
All anyone has ever wanted is a government run by people who are honest, committed and sensible - it really doesn't matter who heads it. The AAP has showed itself to be honest and committed; it appears sensible as well. Of course, translating its energy, commitment and good sense to effective government will take more hard work and, no doubt, a little time. But the energy that is being released as lakhs of Delhi-ites - indeed, millions of Indians - are inspired to shed their "it will never happen" inertia will be the proverbial irresistible force and a joy to behold.
Building on its already well-established momentum, the AAP will certainly capture a sizable majority in the Delhi Assembly in the repeat election. Of course, since this will likely be at the same time as the Lok Sabha elections, the AAP will need to accelerate its recruitment pan-India - which, given the huge numbers of us waiting attendance, will be tough, but certainly do-able. I have already sent them another cheque. But more than money, the AAP needs you.
Coming back to the market, it is obvious that when - and I can now proudly say "when" not "if" - India gets an even halfway reasonable government, it should be worth easily two to three percentage points of economic growth and perhaps four or five rupees on the dollar. I dusted off my old "Cost of Negative Sentiment" model and found that the "correct" value for the rupee today (considering the dollar index and inflation differentials since September 2011) is between 57 and 58. Indeed, a back-of-the-envelope technical analysis I had been looking at for the last few weeks was suggesting a target even stronger than that.
However, a much stronger rupee is definitely not what we need today. Exports are beginning to show some signs of life - and, critically, the US economy appears to be recovering some steam. We need to sustain this trend and it would probably require the rupee to stay weaker than 60 to the dollar for at least some months yet. Remarkably - given the recent terror - if the good fight against inflation remains engaged, other financial sector reforms gather steam, and sentiment (AAP-driven and otherwise) continues to build, we may actually see the Reserve Bank of India intervening on the other side, selling rupees. Raghuram Rajan has shown himself to be a practical man.
Of course, the market will have its say too, and will doubtless find ways to unsettle any calm that develops. For instance, it seems clearer by the day that the US economy is recovering despite the nervousness being shown by the Fed and multiple analysts. Unemployment has fallen to seven per cent and, as I already mentioned, export growth in other major economies - China, for instance - has bounced back dramatically. US monetary policy will tighten sooner rather than later, and this could, once again, deliver a blow to emerging markets and push the rupee weaker. Volatility, as always, is assured.
Again, sustaining sentiment is easier said than done. While there's no rocket science in what needs to be done to strengthen the creaking joints of the Indian economy, the devil, as they say, is in the details, and there's nothing as difficult as getting the job done in a battling (is there any other kind?) political environment. Thus, the rupee's current bloom will probably be hit with some hiccups - political or otherwise. I'd venture a range of 60 to 63.50 till at least the Lok Sabha elections.
However, none of that is anywhere near as important as the really great news that Indian democracy has finally come of age and we all now know that each one of us can make a difference.
Stand up and take a bow - not just Arvind Kejriwal and all at the AAP, but, most importantly, the people of Delhi. Thank you very much.
jamal@mecklai.com
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
