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Informist, Monday, May 19, 2025

 

MUMBAI – MUFG Bank Ltd. expects the rupee to inch slightly higher to 85.00 a dollar by June, it said in a report Monday. Partly due to weakness in the dollar and the reduced risk of a global recession after a pause in US-China tariffs, the Japan-based bank expects the rupee to move higher to 83.50 a dollar by March.

 

The dollar index is expected to fall around 5% by March, the report said. The index, which measures the strength of the greenback against a basket of six major currencies, was 100.19 at 1534 IST, down from 100.98 Friday and 100.81 Thursday. In April, this index had fallen to an over-three-year low of 97.92 amid a tussle between US President Donald Trump and US Federal Reserve Chair Jerome Powell.

 

A likely trade deal with the US, although the exact timeline remains unknown, is expected to boost the Indian currency, as "this will eventually help to bring some certainty to tariffs, and help cement India's ability to substitute for China's exports in some sectors", the report said. An important outcome from the US-India trade deal to watch out for would be the tariff US keeps on Indian goods vis-a-vis on Chinese goods, the bank mentioned in its report.

 

The rupee came under extreme pressure in the second week of May when armed conflict broke out between India and Pakistan. Indian armed forces launched strikes May 7 on nine terrorist camps in Pakistan and Pakistan-occupied Kashmir. The attack was in response to a terrorist attack in Pahalgam in Jammu and Kashmir on Apr. 22, which claimed the lives of 25 Indian civilians and one Nepali citizen. India's strikes were followed by drone and missile attacks by both countries.

 

The ceasefire between India and Pakistan, announced May 10, is likely to support the rupee, the report said. The aim of becoming an alternative manufacturing hub to China disincentivised India from prolonging the military conflict with Pakistan, the bank said in the report. It said the likelihood of future escalation remains low.

 

A stable macroeconomic environment in India, along with lower inflation, contained current account deficit, and resumption of foreign portfolio inflows, is likely to support the Indian currency, according to the report. India's overall inflation is forecast to remain below 4% this calendar year, except in case of a poor southwest monsoon and further global supply-side shocks, as per the report. Further, global oil and commodity prices are expected to be contained, which is likely to limit inflationary pressures.

 

Due to inflation being contained, the expectation of more rate cuts by the Reserve Bank of India to support growth in the financial year 2025-26 (Apr-Mar) have increased, as per the report. MUFG Bank expects the RBI to cut rates by 75 basis points more to bring the repo rate to 5.25% by the end of December.

 

Further, foreign fund inflows into domestic equities have resumed on growing optimism around a potential US-India trade deal. So far in May, net overseas investment in Indian equities was $2.18 billion. In April, the net foreign investment in equities was $1.27 billion. After turning net sellers in January and February, foreign portfolio investors have since been net buyers of shares in the Indian stock market.

 

External commercial borrowings picked up sharply in March, which may support the rupee, the bank said. Indian companies raised $11.04 billion through external commercial borrowings in March, the most since March 2019. "...we are starting to see some normalisation in foreign direct investment repatriation," according to the report. This may also support the rupee.

 

While there are downside risks to remittances to India from the Republican Party's plan in the US to tax outward remittances, India's current account deficit is expected to remain manageable at around 1% of GDP in FY26, which is likely to support the country's currency. MUFG Bank expects India's services trade balance to keep growing and offset the downside risk of weaker goods export and remittances.

 

The rupee, therefore, is likely to remain mostly supported throughout the year. Since December, when Sanjay Malhotra took charge as governor of the RBI, volatility in the dollar/rupee pair has increased. This is due to reduced intervention by the central bank in the foreign exchange market, according to the report. MUFG Bank said that while the RBI has bought dollars to an extent as the dollar-rupee fell, it has been much less than the amount the central bank sold previously during the sharp rupee sell-off in Jul-Dec.

 

Moving forward, the bank expects RBI to broadly refrain from intervening in the currency market. However, it may purchase dollars in small amounts, should the rupee rise sharply. The central bank may also buy dollars due to its large net short forward position of $64 billion as of March, more of which are concentrated in three months to one-year tenors. Therefore, MUFG Bank expects the volatility in dollar/rupee pair to remain high.

 

However, certain developments in May increased downside risks to the rupee. The possibility of a fresh escalation in the India-Pakistan conflict, a lack of clarity on the US-India trade deal, and other developments in US policies such as possible taxation on remittances and restrictions on immigration may cap gains for the rupee, as per the report.  End

 

US$1 = INR 85.40

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

 

Reported by Sourabh Kumar

Edited by Nishant Maher

 

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