The Indian rupee is expected to remain stable this year despite global economic challenges as the Reserve Bank of India’s (RBI) continued to follow periodic two-fold intervention in the forex market, says an expert.
Vijay Valecha, Chief Investment Officer, Century Financial, said global macroeconomic factors, domestic economic growth, foreign direct investments (FDIs), RBI intervention and monetary policy decisions, as well as the trajectory of inflation and trade deficit are likely to drive the rupee’s performance this year.
“There are some positive factors that could support the rupee’s performance relative to other Asian currencies. The rupee offers an attractive carry trade opportunity due to India’s higher interest rates, which make it appealing for investors seeking better returns on their capital,” Valeecha told Khaleej Times.
Additionally, he said anticipated inflows tied to India’s inclusion in global bond indices could increase foreign investment, boosting demand for the rupee and potentially strengthening its position compared to regional peers. “These supportive elements may help offset some of the external challenges facing the currency.”
Steady 2024 performance
In 2024, the Indian rupee hit record lows against the US dollar, reflecting a broader trend of weakness amongst Asian currencies. The Indian currency plunged 2.8 per cent, closing the year at 85.6150 per US dollar, marking its seventh consecutive annual decline.
Nonetheless, the rupee fared relatively better than its Asian peers which plummeted between three per cent to 12 per cent over the same period. Interestingly, the rupee’s weakness was quite modest leading up to September 2024, with much of the deterioration taking place over the fourth quarter of 2024. This was primarily driven by the dollar’s persistent strength. Trump’s victory in the US presidential election stoked fears of a revival in inflationary pressures given his aggressive protectionist policies.
Vijay Valecha, Chief Investment Officer, Century Financial, said the Indian rupee emerged as one of the least volatile Asian currencies, largely owing to the Reserve Bank of India’s (RBI) periodic two-fold intervention in the forex market.
Moreover, numerous economic reports signaled a slight uptick in price pressures. Both factors compelled the Fed to adopt a more cautious approach and indicate fewer interest rate cuts in 2025. This kept the dollar elevated, thereby pressuring emerging market currencies, including the rupee, which spiraled to its all-time low of 85.8075 on December 27, 2024.
Least volatile currency
Despite its weakness, the Indian rupee emerged as one of the least volatile Asian currencies, largely owing to the Reserve Bank of India’s (RBI) periodic two-fold intervention in the forex market. For instance, in third quarter of 2024, a significant increase in portfolio inflows had a limited impact on the rupee’s value, as the RBI stepped in by purchasing dollars. This mediation led to India’s foreign exchange reserves reaching an unprecedented all-time high of $704.89 billion last year. Conversely, when emerging market currencies were pressured by factors like ongoing geopolitical tensions in the Middle East as well as growing uncertainty about the Fed’s path forward – the RBI intervened by selling dollars to safeguard the rupee against adverse depreciation.
The RBI’s attempts to preserve the rupee’s value were contested towards the end of the year due to domestic factors, including a slowdown in India’s growth rate, a widening trade deficit, and increased foreign selloffs in equities.
Outlook for 2025
The factors that pressured the rupee last year could persist in 2025 if similar global dynamics remain in play. The prospect of fewer rate cuts is expected to keep the dollar buoyant in 2025. The Fed’s December 2024 dot plot signaled just two rate cuts in 2025, down from a previous projection of four rate cuts. By contrast, India’s central bank is projected to ease monetary policy by 100bps in 2025. This interest rate differential between the two countries could preserve the dollar’s strength while pushing the rupee lower. Moreover, cross-border capital flows may offer limited support to the rupee if the momentum of foreign purchases of Indian equities and bonds stalls further. This could occur if a risk-averse sentiment persists in the near term and India’s economic growth and reforms fall short of meeting investors’ increasing expectations.
Additionally, if Trump levies hefty import tariffs on foreign goods, it could spark a wave of aggressive trade wars and geopolitical tensions that could fuel risk-off dollar purchases in the short run. As a result, the dollar-rupee (USD/INR) exchange rate could remain above 85 this year.
Influencing factors
The rupee’s performance this year will be governed by global macroeconomic factors, domestic economic growth, foreign direct investments (FDIs), RBI intervention and monetary policy decisions, as well as the trajectory of inflation and trade deficit. The USD-INR currency pair has been trending upwards since the US presidential election in November 2024. After Trump’s inauguration as US president on January 20, 2025, we can expect more clarity on policy implementation in due course. If Trump adopts a very aggressive stance, it could result in a risk-off sentiment that could prop the dollar owing to its safe-heaven appeal.
Furthermore, if forthcoming US economic reports signal a resurgence in inflation, then the Fed would be forced to maintain the higher-for-longer narrative for longer. The INR’s performance could also be influenced by other currencies like the Chinese yuan (CNY). The Indian rupee risks appear to be skewed to the downside given the RBI’s growing forward book.
Furthermore, foreign portfolio investment (FPI) outflows, especially in equities, with $4.7 billion in outflows recorded so far this month, may intensify pressure on the rupee at a time when foreign exchange reserves are declining.
The new RBI Governor, Sanjay Malhotra, faces a challenging backdrop of a slowing economy and potential uptick in inflation due to rising oil prices. He has indicated willingness to allow the rupee to fluctuate more freely in tandem with Asian peers, which could increase volatility. This could enhance export competitiveness.
— muzaffarrizvi@khaleejtimes.com
Muzaffar Rizvi
Muzaffar Rizvi is an accomplished financial journalist with more than 25 years of experience in the UAE and Pakistan. He has good writing skills, strong grip on production and an excellent news sense.
