The worst is not over for rupee as volatility makes a comeback to India’s foreign exchange markets, according to analysts and economists. Uncertainty is expected to heighten in 2025 as US President-elect Donald Trump threatens tariff and adopts inflationary policies.
The Indian currency is expected to move in the broad range of 83.20–87.00 against the greenback in 2025. Two analysts out of 11 expect the rupee to fall to 87.00 a dollar next year.
Many of the analysts and economists expect the uncertainty to fizzle out once markets get a clear picture of Trump's economic agenda and policies. Hence, most of the depreciation is expected to be in the first half of 2025.
The Indian currency is expected to move in the broad range of 83.20–87.00 against the greenback in 2025. Two analysts out of 11 expect the rupee to fall to 87.00 a dollar next year.
Many of the analysts and economists expect the uncertainty to fizzle out once markets get a clear picture of Trump's economic agenda and policies. Hence, most of the depreciation is expected to be in the first half of 2025.
“He’s (Donald Trump) planning to levy tariff on China, Mexico, Canada. He talked about Europe Union also. He’s going to include the top ten countries with which US has a budget deficit,” said Ritesh Bhanshali, director, Mecklai Financial Service Ltd.
In case Trump implements the tariff hikes, prices of import goods in the US will increase, subsequently fuelling inflation. The US Federal Reserve will not be comfortable with cutting rates in such a situation, Bhanshali said. If they are stay high, the dollar index and US Treasury yields will rise, which will weigh on the USDINR pair.
This will create a lot of uncertainties in the market. And markets don’t like uncertainty.Ritesh Bhanshali, Director, Mecklai Financial Service Ltd.
Dollar Index To Strengthen Further
The Fed officials reduced their rate cut projection for 2025 to 50 basis points compared to 100 basis points projected in September. The central bank also raised inflation projection to 2.5% compared 2.1% earlier in its last policy meeting of 2024.
“Rising USD demand, taking into uncertainties arising from expected Trump’s policies, hawkish comments from the Fed towards rate cycle, expected foreign portfolio investors’ outflows from domestic equity markets considering year-end, weak Indian macro numbers and sharp depreciation in Asian currencies are all pointing towards INR weakness,” said Kunal Sodhani, vice president, global trading center, Shinhan Bank.
The dollar index jumped to 108.54, the highest level in over two years on Dec. 20. The index has gained 6.59% in 2024 so far, according to data on Bloomberg.
Weakness In Asian Currencies To Weigh
In such times of dollar strength, market participants expect the offshore Chinese yuan to depreciate sharply as the country tries to stimulate the economy and fight the imminent US tariffs. The currency influences movements of its Asian peers, making a strong case for rupee’s depreciation.
“Relativeness is more important to keep the export competitiveness. Let’s say, if it’s (yuan) moving to 7.45 or 7.50 against the dollar in 2025, there’ll be a possibility, the rupee will go beyond 87.00 per dollar,” said VRC Reddy, head, treasury, Karur Vysya Bank.
The conservative estimate in the current scenario, we can see the rupee closing around 87.00, which implies 2% depreciation.VRC Reddy, Head, Treasury, Karur Vysya Bank.
RBI May Allow Controlled Depreciation
The Reserve Bank of India is expected to reduce the pace of rupee depreciation rather than restricting its fall. On the other hand, the central bank may also absorb dollar inflows to restrict any sharp appreciation in the rupee, market participants said.
"Our competitors are mainly Asian currencies. We're not competing with developed countries for exports. That's why we expect that the RBI will let gradual depreciation of rupee to continue in the first half of the next year with the India's trade deficit clocking around $37 billion," said Abhilash Koikkara, head, forex and commodities, Nuvama Professional clients group. "They won't probably stand any major volatility in the market."
The central bank is expected to focus on India's trade competitiveness as REER touches all-time high in November. The record high REER implied that the rupee is overvalued against its peers which is weighing on trade competitiveness.
India's trade deficit has risen to record high of $37.84 billion in November as merchandise import soared. It touched an all–time high of $69.95 billion.
Rupee’s Real Exchange Effective rate against a basket of 40 currencies, in terms of trade–based weights, rose to 108.14 in November from 107.20 in October. The November figure is the highest ever, according to Informist.
Hindsight
Indian rupee broke out of its narrow range in the second half of the 2024, moving between the broad range of 81.00–83.90 against the US dollar from September 2022 and October 2024.
Last two and half years, volatility almost vanished from Indian foreign exchange market. Rupee entered a declining trajectory from September 2024 as US economic performance unexpectedly improved and Trump’s win became certain in November. In three months to December the rupee witnessed most of its losses against the greenback as money started to move out of riskier assets.
In 2024, the Indian currency declined 2.46%.
The rupee declined 8 paise to a fresh low of 85.28 against the US dollar in Thursday's session. It was trading at 85.26 a dollar as of 11:18 a.m.
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