Mumbai: The rupee has depreciated over 3% in this calendar year, touching an intraday record low of 85.80 per US dollar on Friday, from 83.19/$1 at the start of 2024. Treasury executives and dealers expect this volatility to continue for the next quarter, and expect the rupee to weaken to 86.50/$1 by March 2025, before stabilising as we enter the next fiscal year.
The expected volatility is due to uncertainties from the incoming Donald Trump administration, along with the union budget and measures taken by the monetary policy committee (MPC) of the Reserve Bank of India in February.
However, for an individual, a weakening rupee cuts both ways. Even as international travel and foreign education becomes expensive, those working overseas and sending money home are expected to gain as the local unit slides.
“The pace of depreciation has definitely picked up in the recent past, and I see the rupee touching 86.50/$1 levels by March. January to March is a critical time. After March, the RBI is expected to ease policy rates, and hence we will also start seeing portfolio flows coming back and the rupee stabilising,” said Anshul Chandak, head of treasury at RBL Bank.
In 2024, most of the depreciation – 2.03% of the total 3% weakness – happened in the last three months, after Trump was re-elected as the US president. Also, the policy outlook by the US Federal Reserve increased uncertainties, causing outflows from Indian stocks and bonds.
Executives are concerned about the rupee volatility as tariffs implemented on China will have a downward impact on the rupee and other Asian currencies. Rate strategy of the US Fed will also impact the rupee as the dollar index would gain.
Traders will also be looking for signals from the US Federal Reserve officials on the tone of the rate setting panel in January 2025. The Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The dot plot had earlier projected four cuts in September.
“Considering the rate cut trajectory of the Fed may be lower, the dollar index strengthened and there’s still a lot of scope toward the 110 to 110.5 levels,” said Kunal Sodhani, AGM, forex & rates treasury, Shinhan Bank, India. The US dollar index (DXY) was recently around 108, its highest in nearly two years.
Going forward, the pace of intervention by the Reserve Bank may also decrease as the RBI has to allow the rupee to weaken in order to maintain export competitiveness in the rupee, traders said. India’s foreign exchange reserves fell over $60 billion from a peak of $704 billion in late September, after which the rupee depreciation happened. The Indian currency is overvalued by 8% compared with a basket of the 40-currency real effective exchange rate (REER), indicating the rupee’s relative competitiveness against its peers. REER of the rupee rose to 108.14 in November from 103.7 in January 2024, RBI data showed. The currency was largely stable in 2023 and the first nine months of 2024 as the country witnessed huge inflows in Indian stocks and bonds, which the RBI likely absorbed, as it helped in building its reserves to a peak of $704 billion in September, dealers said