The Indian rupee has faced sustained depreciation against the US dollar in the current financial year (FY25), with a drop of 2.19% so far, and is forecasted to weaken further. Market analysts attribute this decline to the US Federal Reserve’s indication of fewer rate cuts in 2025, supporting a stronger dollar.
Rupee at Record Lows and Projected to Slide Further
As of December 2024, the rupee has depreciated by 0.91% in December and 2.42% for the calendar year. On Thursday, it reached a new all-time low of ₹85.27 per dollar, with the dollar index climbing to 108.15, reflecting the greenback’s strength against major currencies.
According to a Business Standard poll, the rupee is expected to trade at ₹85.78 per dollar by March 2025, while Emkay Global Research estimates it will weaken further to ₹86.25 per dollar.
Divergence in Global Central Bank Policies Boosts Dollar
The rupee’s challenges are exacerbated by a divergence in monetary policies. While the US Federal Reserve plans limited rate cuts, other central banks, including the European Central Bank (ECB), Bank of England (BoE), and People’s Bank of China (PBoC), are leaning towards dovish stances due to economic growth concerns. This policy divergence bolsters the dollar’s appreciation trajectory, further pressuring emerging market currencies like the rupee.
Balance of Payments Deterioration Amplifies Pressure
India’s balance of payments (BoP) has deteriorated significantly, contributing to the rupee’s decline. Up to December 20, FYTD25 has witnessed a BoP deficit of approximately $25 billion, driven by a widening trade deficit and sluggish capital inflows.
- Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI) have slowed.
- The Real Effective Exchange Rate (REER) metric indicates that the rupee is overvalued by 8.1% as of November 2024.
RBI’s Limited Intervention and Its Challenges
The Reserve Bank of India (RBI) has been moderating the rupee’s depreciation through forex interventions, but this strategy has created unintended consequences:
- Increased Overvaluation: While other currencies have depreciated more sharply against the dollar, the rupee’s relative strength has made it less competitive, particularly against Asian peers like the Chinese yuan.
- Liquidity Tightening: RBI interventions have drained rupee liquidity from the domestic market, pushing overnight rates closer to the Marginal Standing Facility (MSF) rate, indicating stress in short-term funding conditions.
Analysts Highlight Need for Competitive Rupee
Market experts suggest that a more competitive rupee is vital to support India’s growth, particularly in exports and manufacturing.
- Abhishek Goenka, CEO of IFA Global, emphasized that export and manufacturing growth are essential for economic recovery, particularly after disappointing Q2 GDP numbers.
- Allowing the rupee to adjust faster would help alleviate overvaluation, reduce the strain on forex reserves, and ease domestic liquidity stress.
Future Outlook: Strengthening Dollar and Rate Cuts
The US Federal Reserve projects a 50 basis point rate cut in 2025, with another expected in 2026. These adjustments follow a 100 basis point cut in 2024, signaling a pause in rate changes until mid-2026. However, decisions will be contingent on evolving economic conditions under the incoming President-elect Donald Trump, who assumes office in January 2025.
As the global landscape evolves, India’s monetary authorities face a delicate balance between maintaining the rupee’s competitiveness and managing domestic financial stability.
