As the Indian rupee’s recent surge hints towards a potential slow down, political events and economic climate are expected to shape the currency’s trajectory later this year. The pre-election positivity, although stirring up buoyant sentiments, is predicted to wane, potentially impacting the steady rise of the rupee. This conclusion was drawn from a poll conducted by Reuters which sampled 30 currency strategists.
Bank officials in Mumbai were witnessed meticulously counting stacks of Indian rupee notes in December 2013, symbolizing the delicate balance the nation is attempting to maintain in these fluctuating economic times. Their predictions indicate a minor depreciation of the rupee, anticipated to reach 60.61 to the US dollar within a month and possibly extending to 62 within a year.
The Bharatiya Janata Party (BJP), labeled as the pro-business opposition, is expected to triumph in the forthcoming elections, a prospect that has been instrumental in the benchmark Indian stock index reaching an all-time high of 22,620.65 recently. Market optimism about the potential of the BJP attracting more investments has largely contributed to this record-breaking performance.
Temporary Reversal of Fate
Overcoming last year’s setback where the rupee lost more than 11% against the US dollar, the currency has managed a comeback, gaining more than 3% in the current year. It reached an eight-month peak at 59.57 to the US dollar recently. This ascent is a remarkable recovery from the near 18-year low at 68.80, recorded last August, following the widespread sell-off by investors.
Emerging market currencies including the rupee took a hit during this period, influenced by the US Federal Reserve’s plan to ease off its significant stimulus program. Investors gravitated away from riskier assets, contributing to the rupee’s downfall. This shift was further compounded by India’s economic growth slowing to a four-year low.
Tackling Economic Challenges
Regardless of the improved investor sentiment, strategists remain sceptical about the longevity of the rupee’s strength. The influx of foreign institutional investments, spurred by the promise of a favourable government and the upcoming elections, is primarily driving the current appreciation of the rupee.
However, the post-election reality may bring a different scenario to the fore. The new government, regardless of its constitution, will grapple with the same challenges currently facing the nation, such as high inflation, elevated borrowing rates, weak industrial production, and subdued demand.
The existing Congress-led coalition government has faced backlash for its apparent inertia in pushing critical reforms, which has negatively impacted both the economic growth and investor sentiment. Furthermore, currency traders speculate that the Reserve Bank of India (RBI) has been actively purchasing dollars, a move aimed at bolstering its foreign exchange reserves while simultaneously controlling the rupee’s surge.
Raghuram Rajan, the RBI Governor, in a recent interview stated that a drastic appreciation of the rupee, reaching 45 or 50 per dollar, could be detrimental to the export sector. However, he clarified that the RBI would allow a certain level of flexibility in the currency’s performance.
In line with these statements, the RBI decided to maintain its key repo rate at 8%, stating that the rates would remain constant in the near future if inflation shows further signs of decline.
The Federal Reserve’s potential move to raise its key interest rate in the latter half of 2025, a prediction shared by many Wall Street economists, will likely cause the dollar to strengthen, thereby pressuring the rupee to weaken further.
The shift in the Fed’s policy is perceived as beneficial to the dollar, and this remains a crucial factor in predicting the rupee’s softening. The upcoming political and economic developments will undoubtedly shape the trajectory of the rupee in these uncertain times. However, the predictions remain speculative and the real outcomes will unfold with time.