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Informist, Friday, Jan. 3, 2025

 

By Sourabh Kumar and Pratiksha

 

MUMBAI/NEW DELHI – The rupee is set for another monthly fall against the US dollar in January owing to strength in the greenback and the Reserve Bank of India loosening its grip on the exchange rate. However, the decline in the Indian currency this month is unlikely to be as sharp as its 1.3?ll against the dollar in December.

 

According to the median of the estimates of 20 foreign exchange traders from banks, corporate houses, and brokerage firms, the rupee is seen at 85.8 per dollar by the end of January, as against 85.6150 at the end of December. The weakness is expected to continue in the subsequent months too, with the median of the estimates of 15 respondents indicating that the rupee may end 2024-25 (Apr-Mar) at 86.1 per dollar. Early signs at the beginning of 2025 point to a decline, with the rupee closing at 85.74 per dollar on Thursday.

 

The dollar index, which measures the strength of the greenback against a basket of six major currencies, rose to an over-two-year high of 109.58 on Thursday and is likely to be one of the biggest pain points for the rupee. Market players are of the opinion that the index will continue to strengthen as US president-elect Donald Trump's policies come increasingly into focus following his inauguration on Jan. 20.

 

Trump's protectionist policies, which are widely expected to not only boost US growth but also add to price pressures, and the Federal Reserve's decision to adopt a cautious approach towards rate cuts are also expected to support the dollar index, poll respondents said. Fed funds futures prices currently suggest an 88.8% probability of the Fed leaving interest rates unchanged at 4.25-4.50% on Jan. 29.

 

"It is very much possible for the dollar index to rise from here," said Ritesh Bhansali, director at Mecklai Financial Services Ltd. "With Trump threatening to impose so much of tariff on countries like China and others, they will also hit back, and ultimately, this will create (a) tariff war, driving the dollar index higher."

 

Of the 20 respondents in the poll, 12 expect the rupee to test the psychologically crucial level of 86 per dollar in January. In fact, four participants expect the rupee to fall convincingly below that level. Poll estimates were in a wide range of 84.25-86.60 per dollar, reflecting the uncertainty that accompanies crucial policy decisions: the Fed's interest rate decision will be followed by the presentation of the FY26 Budget on Feb. 1 and India's own interest rate decision on Feb. 7.

 

A weak Chinese yuan may also hurt the Indian unit, with data showing limited impact of recent stimulus measures announced by the government to spur growth in the world's second-largest economy. The threat of new tariffs after Trump assumes presidency does not help the yuan's case either. At the same time, China has indicated its willingness to allow the yuan to depreciate more in 2025 to counter any tariffs imposed by the US, with the offshore yuan on Tuesday falling to its lowest level against the US dollar in more than two years.

 

LESS INTERVENTIONIST RBI

The RBI, which spent much of 2024 curbing even moderate fluctuations in the exchange rate, has seemingly allowed the rupee more freedom over the last two months, so much so that in Nov-Dec, it weakened 1.8% against the dollar. For 2024 as a whole, the depreciation amounted to 2.9%. According to market participants, the shift in the RBI's intervention strategy will be a major factor in driving the currency lower in the coming weeks.

 

"The RBI's FX policy seems to have shifted and understandably so. One, the rupee remains quite expensive on REER (Real Effective Exchange Rate) basis, both in absolute and relative terms in Asia, which could be hurting the trade balance," Dhiraj Nim, FX strategist and economist at ANZ Banking Group, said, adding that both 'push' and 'pull' factors--external headwinds and the domestic growth-inflation mix, respectively--were not favouring the rupee after several years. As per latest RBI data, the rupee's Real Effective Exchange Rate rose to a record 108.14 in November when measured against a basket of 40 currencies as per their trade importance, suggesting overvaluation of around 8%.

 

The RBI's increased willingness to let the rupee find its market price has also led to some importers hedging their exposure after a period that saw complacency creep in due to the stability in the exchange rate engineered by the Indian central bank. However, the hedging of exposure has resulted in strong demand for dollars and this is only expected to increase from here on.

 

To be sure, the RBI is not seen letting go of the leash completely. Market participants expect the central bank to continue to mark its presence by selling dollars as and when it deems necessary. The new year will also see foreign portfolio investors make fresh fund allocations to various asset classes, which may lead to a stream of inflows into Indian markets. The rupee may also find some comfort in inflows into local debt ahead of the addition of Indian government bonds to Bloomberg's Emerging Market Local Currency Index starting Jan. 31, market players said.

 

POLL DETAILS

 

Participant	Jan-end	Mar-end
ANZ Banking Group	85.50-86.00	-
Bank of Bahrain and Kuwait	85.00-86.25	84.50-87.00
CR Forex	85.20-86.00	85.00-85.50
CSB Bank	85.50	85.25
Finrex Treasury Advisors LLP	86.00	85.50
Foreign bank	86.00	86.50
HDFC Securities	85.20-85.99	-
ICBC	85.75-86.00	-
IDFC FIRST Bank	86.00	86.00-86.50
Karur Vysaya Bank	85.80	86.20-86.60
Kotak Mahindra Bank	86.50	86.25
Kotak Securities	85.75	86.50
Large brokerage firm	84.25-86.25	-
Large state-owned oil company	85.50	86.00
Large engineering company	86.00	85.00
LKP Securities	85.95	-
Mecklai Financial Services	84.80	86.20
Shinhan Bank India	85.40-86.60	85.05-86.50
State-owned Bank	85.90	86.20
UCO Bank	86.00	86.00-86.20
Median	85.84	86.10

 

End

 

US$1 = INR 85.76

 

With inputs from Gowri Lakshmi

Edited by Avishek Dutta

 

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