Rupee to underperform peers despite weakness in dollar, says Barclays
This story was originally published at 16:05 IST on 27 May 2025
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NEW DELHI – The rupee is expected to underperform its peer currencies even as the dollar remains under pressure, Barclays said in a research report Tuesday, adding that the Reserve Bank of India would want to maintain the Indian unit's competitiveness.
"While the drop in the NEER (nominal effective exchange rate) creates room to allow for INR (rupee) appreciation during bouts of dollar weakness, we continue to believe that the RBI will want to maintain currency competitiveness," strategists led by Mitul Kotecha said in the note. "We think this implies INR underperformance on USD (dollar) weakness and a move in line with peers on any USD strength."
The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, fell to a 23-month low of 100.80 in April, while the nominal effective exchange rate against a basket of 40 currencies rose marginally to 89.70 last month.
According to Barclays, the recent bout of appreciation in the rupee is unlikely to be sustained and the rupee will find a floor around 84.50-85.00 in the short term. "We expect the INR to eventually return to its long-term depreciation trend after some near-term gains," it said. The domestic currency has appreciated over 2.4% against the dollar since March.
Barclays also expects limited downside risks to the dollar going ahead as US macroeconomic data remain resilient and as a repeat of the pre-tariff front-loading of imports is not expected. The dollar index, which measures the strength of the greenback against a basket of six major currencies, has declined almost 8.5% so far this calendar year.
Barclays expects the RBI to focus on replenishing its foreign exchange reserves, which have fallen almost $20 billion from the all-time high of $704.89 billion hit in late September, further limiting appreciation in the rupee.
The RBI is likely to be keen to allow the dollar/rupee forward book to run off, benefiting from the softer dollar environment at present, Barclays said. The central bank's net outstanding sales of dollar/rupee forward contracts were at $84.35 billion at the end of March.
The rupee is expected to be increasingly sensitive to external developments, including to oil prices, the dollar index, and equity gyrations, the report said. "As such, any rise in oil prices in the wake of rising geopolitical risks and/or a broad dollar rally would likely fuel increased pressure on the rupee," it said.
Barclays expects the RBI to focus on gyrations in the Chinese yuan, as further depreciation in the Chinese currency would put pressure on India to maintain its competitiveness in third-country markets, prevent India's imports from China rising sharply, and not lose out to other countries in terms of disinvestment flows from China.
Barclays projects India's current account balance to remain largely stable in the financial year 2025-26 (Apr-Mar), with a services surplus helping to partially offset a potential widening of the merchandise trade deficit. India's current account deficit narrowed to $11.46 billion in Oct-Dec from $16.67 billion in Jul-Sept, although it was slightly higher than $10.42 billion in the third quarter of FY24. In percentage terms, while the current account deficit was unchanged in Oct-Dec from a year ago at 1.1% of GDP, it was down from 1.8% of GDP in Jul-Sept.
The report noted that the widening of India's merchandise trade deficit to $21.54 billion in March was broadly due to a rise in oil imports on the back of a fall in crude oil prices. "Should increased oil import volumes be sustained in the months ahead and/or prices rise, this could fuel a further widening in trade deficit and consequent INR pressure. We are also not optimistic that US-India tariff negotiations will deliver a quick boost to trade," it said. End
US$1 = INR 85.34
Reported by Pratiksha
Edited by Rajeev Pai
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