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Informist, Monday, May. 5, 2025

 

NEW DELHI – The Reserve of India is likely to maintain a light-touch approach in terms of its intervention in the foreign exchange market in the current financial market environment, according to ANZ Research. "Currency competitiveness is currently stable, and keeping a low-profile foreign exchange policy is preferable during the US trade deal negotiations," it said in a research report on Tuesday.

 

This comes against the backdrop of the ongoing negotiations between India and the US over a proposed bilateral trade agreement after US President Donald Trump on Apr. 2 announced reciprocal tariffs on countries to address what he perceives as unfair trade practices by them and to reduce the US' trade deficit. He imposed 26% duty on goods imported from India. However, on Apr. 9, he declared a 90-day pause on the tariffs and dropped the rate to 10% during this period.

 

ANZ Research revised its forecast for the rupee to 86.00 a dollar by 2025-end from 88.50. It now sees the rupee at 86.50 a dollar by the end of 2025-26 (Apr-Mar), against 88.70 earlier.   

 

The rupee has appreciated over 3.5% since March, mainly due to a globally weakening dollar and foreign fund inflows. As per currency dealers, the central bank has only intermittently and passively intervened through dollar purchases during this bout of appreciation.  

 

The report expects the central bank to maintain dollar/rupee at around 84.5–85.0 a dollar if significant rupee appreciation pressures build up. In the medium term, it anticipates the domestic currency to weaken modestly if global trade tensions and risk-off sentiment ease. "The DXY (dollar index) could rise, though not to previous levels that reflected significant overvaluation. If the DXY reverts to 101–102, USD/INR (dollar/rupee) could settle around 86.0–86.5," it said.

 

The report noted that the rupee has generally been trading more freely under the RBI's new Governor Sanjay Malhotra, but expects minor dollar buying intervention by the central bank to continue, given the RBI's stretched net short forward book position. The RBI's net outstanding sales of dollar/rupee forward contracts were at $84.35 billion at the end of March. 

 

ANZ Research is not concerned about the rupee's trade competitiveness and expects the Indian currency's real effective exchange rate to be under control. The local unit's competitiveness has improved despite its appreciation against the dollar, thanks to India's low inflation and cross-currency depreciation, it said.

 

"Consensus forecasts suggest India's inflation differential with major trading partners will remain subdued through 2025, keeping the REER index in check," it said. The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, fell to a 22-month low of 101.49 in March. 

 

The research report said it is unclear if the rupee is at peak volatility, and that a US-India trade deal amid broader trade tensions could still put appreciation pressure on the Indian unit. It sees near-term downside risk to the dollar/rupee, but expects the RBI to be careful to not let the rupee outperform significantly, especially against the Chinese yuan.  End

 

US$1 = INR 84.28

 

Reported by Pratiksha

Edited by Avishek Dutta

 

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