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Informist, Tuesday, Dec. 31, 2024

 

By Pratiksha and Sourabh Kumar

 

NEW DELHI/MUMBAI – The current calendar year has been a strange one for the Indian rupee. After a prolonged period of stability, the final few months were painful. And if global and domestic cues are to be believed, the Indian currency's weak run is far from over. In fact, the rupee may be much worse off in the new year, market participants said.

 

The rupee depreciated 2.7% against the dollar so far this year as it hit multiple fresh all-time lows, the lowest being 85.8075 per dollar in December. At 1250 IST, the rupee was at 85.62 a dollar. According to market participants, the local unit is expected to move in a range of 84.50-87.50 a dollar in 2025, as the Reserve Bank of India loosening its stranglehold on the currency, a strengthening US dollar, and weakness in the offshore Chinese yuan may exert pressure on it.

 

"The Indian rupee has displayed resilience amid a challenging global currency landscape, largely due to the RBI's adept management," Kotak Securities said in a report. "However, as we head into 2025, the confluence of US policy changes, retaliatory global measures, and the overarching influence of the Federal Reserve is likely to create a much more volatile trading environment."

 

The Indian central bank, which prevented even moderate fluctuations in the exchange rate for much of 2024, seems to have developed a new tolerance for depreciation in recent weeks, with market participants of the view that the change in the RBI's intervention strategy will be the prime factor in driving the currency lower next year.

 

The visible decline in the rupee towards the end of the year coincided with two other events. First, the rupee's real effective exchange rate against a basket of 40 currencies, based on trade weights, rose to a record 108.14 in November, suggesting that the rupee was overvalued by around 8%. The second was Sanjay Malhotra succeeding Shaktikanta Das as the governor of the RBI, which fuelled expectations of a shift in the apex bank's intervention strategy.

 

FROM US TO CHINA

On the global front, the potential strengthening of the US dollar after Donald Trump takes over as President in the second half of January will be the main source of risk for the Indian currency, according to market participants. Trump's proposals on tax cuts, tariff hikes, and tighter immigration policies are seen as pro-growth as well as inflationary, which will keep US Treasury yields and the dollar's value elevated. According to Kotak Mahindra Bank economists, 2025 will mostly be "a story of USD (US dollar) strength."

 

Even US monetary policy is expected to support the greenback next year, thanks to the Federal Reserve's decision to adopt a cautious approach towards rate cuts in 2025. With likely fewer interest rate cuts in the US and potentially more stimulus measures by China to deal with Trump's tariffs and trade barriers, the outlook for foreign inflows into India is not encouraging. Moreover, Beijing is expected to consider letting the yuan depreciate to counter the incoming trade battle between the world's two largest economies.

 

"With the CNY (yuan) assuming the largest weight in India's total trade basket, authorities are likely to align rupee's movements to the yuan as well," economists at DBS Bank said in a report.

 

FLOWS AND OIL

Traders may take some comfort in the inflows into local debt on account of Indian government bonds being added to Bloomberg's Emerging Market Local Currency Index starting Jan. 31, and into FTSE Russell's indices in September next year. But the impact of both events on the exchange rate may be minimal, as the RBI may utilise any opportunity to replenish its foreign exchange buffers.

 

The central bank's defence of the rupee in the second half of 2024 has been costly, with India's foreign exchange reserves depleting to a near-eight-month low of $644.39 billion in the week ended Dec. 20, down over $60 billion from the record high of $704.89 billion hit in late September.

 

Adding to pressures will be the RBI's own interest rate policy, with the central bank seen kicking off rate cuts early next year. While the cycle is expected to be shallow and may see the repo rate being lowered by only 50-75 basis points, it would still exert some pressure on the rupee, market participants said.

 

Amid such challenges, the relative calm in crude oil prices offers some hope. Despite mounting geopolitical tensions in West Asia, Brent crude prices fell over 3% this year. With the Organization of Petroleum Exporting Countries repeatedly cutting the demand outlook for crude oil in 2025 due to weak global growth, market participants expect prices to remain on the lower side. According to the US Energy Information Administration, Brent crude oil prices are likely to average at $74 per barrel in 2025 as against $81 per barrel in 2024.

 

NO LOSING CONTROL

The RBI may have relaxed its grip on the rupee towards the end of 2024, and may continue to do so in 2025 as well, but it is unlikely to let the local unit slide and is expected to continue making use of its massive foreign exchange reserves war chest.

 

"We think RBI will continue to have both the ability and willingness to cap realised volatility in USD/INR (dollar/rupee), but should allow some gradual rise in the pair over time, partly reflecting softer domestic fundamentals," MUFG Bank said in a note.

 

The end result, market participants said, is that the rupee may continue to outperform its Asian peers next year as well, all thanks to the RBI.

 

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

US$1 = INR 85.61

 

Edited by Tanima Banerjee

 

 

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