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Informist, Tuesday, Dec. 17, 2024

MUMBAI – The Indian rupee may fall to 86.50 a dollar over the next 12 months, according to IDFC First Bank Chief Economist Gaura Sen Gupta, who said in a report Monday that a gradual decline in the currency will help reduce the Reserve Bank of India's intervention in the foreign exchange market and put a check on the consequent draining of rupee liquidity.

"The relative stability of the INR against the dollar, has resulted in the INR strengthening against other currencies," Sen Gupta said, noting that the central bank's interventions to keep the exchange rate stable had led to a fall of $50 billion in the foreign exchange reserves in recent months. "The decline would have been much more if RBI didn't conduct the buy-sell swaps," Sen Gupta added. According to her, the rupee is currently overvalued by over 7% as per the RBI's 40-currency, trade-weighted Rupee Effective Exchange Rate, which stood at 107.21 in October.

Sen Gupta sees the rupee at 85.50 per dollar by March and staying there till June before weakening to 86.00 per dollar by September and 86.50 by December. This suggests the rupee will weaken by 1.9% over the next 12 months. So far in 2024, it has depreciated by 2.0%.

While the RBI has maintained that it does not target any specific level of the exchange rate and only looks to reduce any undue volatility and anchor market expectations, market participants have noted increased intervention by the central bank over the last year or so and in the last 2-3 months in particular, as the currency came under severe pressure from outflows ahead of the US presidential elections in November, with October seeing outflows of over $11 billion from Indian financial markets--the most since March 2020.

A high trade imbalance has added to the pressure on the rupee, with India's merchandise imports and the trade deficit hitting an all-time high of $70 billion and $38 billion, respectively, in November. Apart from sale of dollars in the spot market, the RBI has also intervened through forwards as well as the non-deliverable forwards markets, among others, to prevent a continued rapid decline in the foreign exchange reserves. To boost capital inflows, the RBI earlier this month raised the ceiling on interest rates for Foreign Currency Non-Resident Bank deposits until the end of the current financial year.

The RBI's forex interventions have also affected the Indian banking system's liquidity conditions, with rupee liquidity tightening in recent weeks and forcing the central bank to lower the Cash Reserve Ratio by 50 basis points to 4.00%. According to Sen Gupta, the infusion of liquidity from the CRR cut is unlikely to be sufficient to prevent tightness in liquidity given the tax outflows due this month and the usual currency leakages in the second half of the financial year. "If Balance of Payments doesn't turn positive in Q4FY25 (Oct-Dec) and that too a large positive, RBI might have to undertake further durable liquidity measures. These could consist of longer-term repos, USD/INR swaps and OMO (open market operations) purchases. That said, the possibility of purchases is lower given strong demand for g-secs (government securities)."  End

US$1 = INR 84.92

Reported by Gowri Lakshmi

Edited by Ashish Shirke

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