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Informist, Tuesday, Mar. 25, 2025

 

NEW DELHI – The outlook on the rupee has brightened and the Indian currency is now expected to fall to 87.50 against the dollar by the end of 2025, compared with 88.50 per dollar previously expected, MUFG Bank said on Tuesday. 

 

"We turn neutral on INR (Indian rupee) and no longer think INR will underperform Asian FX," Michael Wan, senior currency analyst, at MUFG Bank said in a report. "This is driven by both global factors such as a weaker dollar, but more importantly also local factors such as a smaller current account deficit and softer inflation," Wan noted.

 

The rupee has risen 2% against the dollar in March to around 85.70 a the dolalr, recouping most losses the currency had incurred in 2025. While global factors have helped the recent rise in the rupee, the Indian currency has outperformed other Asian currencies this month, indicating important local drivers underpinning India's foreign exchange strength, MUFG Bank said. 

 

Even as the outlook on the rupee has improved, the Indian currency should fall from here against the dollar, the report said. "First, we think markets are underpricing the risk of reciprocal tariffs on India. Second, India's growth remains relatively soft and is likely to disappoint expectations in our view, with market valuations still quite high," MUFG Bank said. 

 

India should in theory see the sharpest rise in reciprocal import tariffs by the US in Asia, the report said, adding that India should also be quite vulnerable to any US retaliation on non-tariff barriers and high digital taxes. "While India is generally more domestically-oriented to begin with, reciprocal tariffs if raised to a meaningful level will still have a negative impact on India's growth prospect in 2025," MUFG Bank said.

 

MUFG Bank forecasts India's GDP growth at 6% in FY25 and 6.4% in FY26--both lower than the government's estimate of 6.5% for the current year and RBI's projection of 6.7% for next year. MUFG Bank has lowered the forecast for India's inflation to 4.1% in FY26 from 4.2% previously expected. CPI inflation fell to a seven-month low of 3.61% in February, and MUFG expects it to end FY25 at 4%. 

 

With the current growth-inflation mix, the RBI's Monetary Policy Committee is expected to deliver three more interest rate cuts of 25 basis points each in 2025, bringing the repo rate to 5.50%, MUFG Bank said. The MPC lowered the repo rate by 25 bps in February, delivering the first rate cut since May 2020.

 

MUFG Bank said that the RBI should have some incentive to rebuild foreign exchange reserves moving forward. "Admittedly, RBI has been much more hands-off than we anticipated, and as such also raises the question of whether we should anticipate greater two-way swings in USD/INR moving forward," the report said. "Nonetheless, with RBI's meaningful net-short position in its forward book (US$77 bln as of January 2025), we think the central bank should increasingly have an incentive to rebuild FX reserves moving forward."  End

 

US$1 = INR 85.78

 

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

 

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