Indian Rupee Likely To Appreciate; Bank of Baroda Expert
Indian rupee is likely to show an appreciating bias in the next fortnight aided by both external as well as internal factors.
The Indian Rupee appreciated by 0.1 per cent in June 2024, even as it touched a record low of 83.65 per US dollar during the month. Stable oil prices and resumption in FPI inflows towards the latter part of the month supported the Indian rupee. Thus, it is likely to show an appreciating bias in the next fortnight, aided by both external and internal factors, believes Aditi Gupta, economic expert at Bank of Baroda (BoB). She finds that moderation in core personal consumption expenditure (PCE) in the US, along with weakening inflation expectations, will weigh on the dollar, which is positive for the Indian rupee. However, there are some risks.
She anticipates that the US dollar will weaken shortly based on the changing macroeconomic picture, but there are unique variables at work because of the shifting political climate in the US. Donald Trump, the Republican nominee, gained a slight advantage in the first US presidential debate. It is generally accepted that initiatives like tariff increases and increased government spending may potentially undo the progress made on inflation if Trump wins.
The US elections are set for November 2024, thus the markets are expected to be extremely volatile as they factor in this potential. This has so far shown itself as a severe sell-off in the US 10-year Treasury yield, which has increased by 17 basis points since the debate. A sustained increase in US yields might pressure the rupee and drive up the US dollar index (DXY). If this were to happen, the RBI's substantial foreign exchange cushion of more than USD 650 billion should assist in maintaining the rupee's range-bound.
She stated that foreign currency rate stability and external stability depend on foreign portfolio inflows (FPIs) because they are essential for funding the current account deficit (CAD). Foreign Portfolio Investment (FPI) inflows into India have been very subdued thus far in FY25, totalling USD 2 billion (statistics as of 1 July 2024). Since it was generally anticipated that strong debt inflows would augment stock inflows, a significant portion of the rupee's strength in FY25 was predicated on buoyant FPI inflows. There may be pressure on the Indian rupee if we do not witness a significant increase in FPI inflows in the upcoming months, particularly if the dollar rise continues.
However, she writes that since the FPI utilisation rate remains low, we can expect a further pickup in debt inflows in the coming months as India’s weight in the index increases. It will also be supplemented by inflows on account of the Bloomberg bond index, which is scheduled to begin on January 25. Also, CAD is estimated to remain in a comfortable range of 1 to 1.5 per cent of GDP, which is likely to be adequately financed by foreign inflows on account of FDI and ECBs and will hence not have a sizeable impact on the Indian rupee.
