Rupee expected to weaken more in coming months

While some see rupee touching 87-levels in the next three-four months, others see the rupee holding its own after 86.2. On Thursday, it closed at 85.75.  (REUTERS)
While some see rupee touching 87-levels in the next three-four months, others see the rupee holding its own after 86.2. On Thursday, it closed at 85.75. (REUTERS)

Summary

  • In 2024, the local currency weakened 2.9% but less than 3% depreciation in the Chinese yuan against the dollar.

Mumbai: The rupee is expected to further weaken in the coming months as Trump’s presidency strengthens the dollar at least in the near-term, experts said, adding that the central bank's interventions in the currency market are likely to ease. 

In 2024, the local currency lost 2.9% but the depreciation was lower than some of the other Asian currencies. According to Bloomberg data, yuan lost 3% against the dollar in the same period. 

Experts said that the lower depreciation so far when compared to other currencies is also a reason why there is room for more correction. While some see rupee touching the 87-levels in the next three-four months, others see the rupee holding its own after 86.2. On Thursday, it closed at 85.75.

“There is a pending depreciation pressure visible on the rupee and that is seen in the REER overvaluation of around 8%," said Kanika Pasricha, chief economic advisor, Union Bank of India. “…we have depreciated in the recent dollar index spike relatively less compared to our trade partners."

The real effective exchange rate (REER) is an inflation-adjusted trade-weighted average value of the domestic currency in terms of its trading partners’ currencies. 

Since 5 November, the euro has weakened over 5.3% against the dollar, yuan 2.7% but the rupee has depreciated about 1.8%, said Pasricha, referring to the movement in currencies following Donald Trump's win in the US presidential election. Trump has promised a 60% tariff on Chinese goods and a loose fiscal policy, although whether he goes through with these would be clearer on or after 20 January when he assumes office.

“On a long-term basis,the rupee is still a depreciating currency from the economic fundamentals standpoint. This is because of two factors: we still have a current account and a fiscal deficit, although it is in a consolidation mode," said Pasricha, who expects a deterioration in current account dynamics in FY25.

In 2023 as well, the yuan (2.94%) had depreciated more than the rupee (0.57%).

Read more: Weak rupee dented dollar returns for already wary foreign investors in 2024

“The rupee normally moves in bouts of depreciation ... It does not move much for two years and then next year it moves a lot. This possibly seems like one of those times when the rupee has moved a lot," said Abhishek Goenka, founder and chief executive of IFA Global, a treasury and forex advisory company.

According to Goenka, the Reserve Bank of India (RBI) was earlier intervening to manage the rupee and it had become slightly overvalued as compared to other Asian currencies. “This time round when we saw significant outflows in the equity markets, RBI was intervening aggressively but we used around $50-60 billion of reserves to defend the rupee," said Goenka. 

India’s foreign exchange reserves hit a high of $704.9 billion on 27 September but has now shrunk to $644.4 billion as on 20 December, showed data from RBI. Then RBI governor Shaktikanta Das said on 6 December that forex reserves were “quite robust" and “the depletion in the reserve, which has happened in the last few months, part of it and a good part of it is because of valuation losses". 

Overseas investors have also been cautious on Indian equities. Foreign portfolio investors were net buyers of $124 million worth of Indian equities in 2024, down from $20.7 billion in 2023, showed data from NSDL. Experts said they would keenly watch how FPIs behave in January to see whether these investors remain cautious or the flows return to the Indian market.

Meanwhile, there are others who do not expect the RBI to just watch the rupee depreciate.

“We do not see RBI relenting on intervening in the forex market to check volatility. With Trump coming in on 20 January, we are going to see the rupee depreciate further to 87 levels by April-May," said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities. 

“It will depend on what his announcements are."

Read more: Weak rupee a new worry for paint companies

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS