Rupee eyes record strength as India outpaces the west

The rupee free fall
Despite RBI intervention, the rupee remains vulnerable due to a potential shift in US monetary policy and global economic slowdown.

The rupee demonstrated notable stability this year, showing the least volatility against the dollar in almost three decades. During the current calendar year, the Indian currency depreciated by just 0.5% against the greenback. This level of stability has not been seen since 1994 when the domestic currency appreciated by 0.4%. Given the current circumstances, experts anticipate the rupee will maintain its strength into the next year. Despite a muted performance in the latter half of this year, the rupee is poised for a brighter 2024. However, much depends on the Reserve Bank of India’s intervention strategies.

The rupee’s current performance is partly due to the RBI’s timely interventions in the foreign exchange market, involving both buying and selling dollars. Additionally, robust foreign inflows into the domestic market have helped support the rupee amid global uncertainties. The RBI remained active throughout the year, countering exchange rate volatility. Without such interventions, the rupee could have weakened to 84 this year.

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Rupee outlook for 2024

In 2024, the rupee may strengthen, buoyed by foreign inflows, and potentially appreciate to 82. The conclusion of the global rate-hiking cycle is expected to increase the rupee’s appeal. India’s robust economic growth, contrasting with the slowdown in Western economies, will further support the currency, according to a note from DBS.

Market analysts are cautiously optimistic, predicting that the dollar to rupee rate will stabilise at around Rs 82.4 by September next year. Economic growth, interest rates, and global events will be key influencing factors. While the dollar might strengthen due to its economic resilience, India’s policies and global dynamics will also play significant roles. However, these predictions are not set in stone, and currency markets remain inherently volatile.

India’s current account deficit to GDP ratio for FY24 is projected at 1.7%, an improvement from the FY23 figure. The FY24 GDP growth forecast has been revised upward to 7%, outperforming many of India’s peers. This positive outlook is expected to keep the rupee buoyant. The rupee may trade between 82 and 80, buoyed by expected inflows following India’s inclusion in the JP Morgan bond index. This inclusion, announced on September 22, is anticipated to bring in $25-30 billion in inflows.

Beyond external factors, domestic economic performance remains an important determinant of the rupee’s future trajectory. Continued focus on attracting foreign direct investment, increasing exports, and boosting domestic manufacturing will strengthen the currency’s fundamentals. Additionally, managing fiscal deficits and inflation within acceptable limits will further enhance the rupee’s appeal to foreign investors. By prioritising these domestic growth drivers, India can create a robust foundation for sustained currency stability in the long run.

Interest rate cuts and impact on rupee

In response to global economic challenges, central banks worldwide tightened monetary policies to manage inflation. For 2024, there is an optimistic outlook for economic recovery and central bank actions. The Federal Reserve hinted at three potential interest rate cuts in 2024. The RBI is likely to follow suit, potentially initiating rate cuts after a three-month lag following the Fed’s projected May cut. The market anticipates that the current quarter might mark the economic cycle’s nadir, leading to a relaxation of repo rates in the following months.

While the outlook for 2024 seems promising, several external factors can disrupt the rupee’s stability. These include geopolitical tensions, rising oil prices, and potential policy shifts by major central banks. The RBI’s ability to navigate these uncertainties effectively, through its forex interventions and monetary policy adjustments, will be crucial in maintaining the rupee’s resilience. A clear communication strategy from the RBI, outlining its response plans to such headwinds, can further alleviate market anxieties and provide much-needed confidence.

Last month, the rupee reached a record high of 83.48 against the US dollar. This peak occurred despite a November recovery among most emerging-market currencies against the dollar. The rupee lagged, primarily due to persistent dollar demand among importers. Expected inflows from India’s inclusion in the JP Morgan bond index are set to begin in January. Additionally, geopolitical tensions in West Asia and rising crude oil prices have contributed to the rupee’s depreciation since October, exacerbated by increased foreign outflows. So far this financial year, the rupee has depreciated by 1.2%.

The dollar versus rupee exchange rate is crucial for international trade. A strong rupee against the US dollar can make Indian exports more expensive for foreign buyers, potentially affecting trade volumes. Conversely, a weaker rupee can enhance the competitiveness of Indian goods in global markets, boosting exports. However, it also means a higher import bill and a widening current account deficit.