Passage to India: Demonetization and the Indian Cash Crunch

Passage to India—Demonetization and the Indian Cash Crunch

It has been a volatile year for India and its currency. Even as two high-value banknotes were removed from circulation, the Reserve Bank of India opted to maintain current interest rates to ease market volatility. With more multinationals doing business in India these days we offer insight on how companies might rethink their FX exposures in light of India’s recent events.

Acting on campaign promises to fight corruption, Indian Prime Minister Narendra Modi recently pulled the plug on the use of two important currency denominations – the 500 and the 1000 rupee banknotes. In a country still heavily reliant on cash transactions, the demonetization of its two most popular banknotes wreaked havoc on businesses. Moreover, the delayed arrival of the new 500 and 2,000 notes threatened to derail liquidity in an already cash-strapped economy. The currency conversation transitioned from fighting corruption to the need to modernize India’s cash-dependent economy.

Despite these developments, India continues to be one of the world’s economic bright spots. A long established center for outsourced services, more multinationals are looking to India for manufacturing and operational support.  On the trade front, U.S. President Donald Trump, remains neutral about America’s relationship with India, even as he maintains more protectionist rhetoric towards other countries. This has helped the rupee stay relatively steady against the dollar. What’s more: India’s boom appears to be sticking around--analysts estimate the country’s growth prospects to be stronger than any emerging market.  

From the recent demonetization to the implementation of policies designed to attract foreign investment, India appears to be doubling down on its role as a business center for multinational companies of all sizes. With small and mid-size firms now just as likely to have cash flows involving the Indian rupee, financial teams must be aware of current events while simultaneously preparing to make the most of India’s exciting growth trajectory. Here are some ways that corporate finance teams dealing with Indian exposure can position themselves in the months ahead:

·       Smarter FX platforms:  Nobody predicted India’s demonetization maneuver nor can anyone be certain of real-time challenges that might happen at anytime in future. For this reason, having a smart API for FX—one that offers a reliable feed for currency-specific data, market data, and central bank rates—will help firms be prepared for any developments involving India and its currency.

·       Vet your provider: In order to optimize foreign exchange transactions with India, whether to send or receive international payments, having an FX provider that can offer swift and hassle-free solutions in compliance with the local and international standards. India’s economy, like its global counterparts, is very sensitive to its political climate and other geopolitical issues. Therefore, an FX provider that factors in and has the capability to look at trends and predict imminent market implications will do wonders for a company’s bottom line.

·       Easy access to history: For smarter and efficient decision making, it’s imperative to have easy access to fast, reliable data for tracking and spot checking exchange rates against the Indian rupee. While choosing a FX platform to glean historical data for dollar vs. the rupee, it is advisable to look for the ones that have a reputation of providing payment solutions for corporations with business ties to India.