The Indian rupee is likely to appreciate against the US dollar in 2024, after logging a stable 2023, on a plethora of factors including anticipation of continued foreign inflows, with the local currency possibly strengthening up to Rs 82 per dollar during the year.
Market participants highlight the Reserve Bank of India’s (RBI)intervention, involving both the selling and buying of dollars, as a key factor in maintaining the rupee’s stability. Robust foreign inflows into the domestic market have also played a pivotal role, providing resilience to the rupee amidst global uncertainties. The RBI’s proactive measures throughout the year have successfully curbed volatility, preventing the local currency from further weakening.
The rupee exhibited exceptional stability against the US dollar in the current calendar year, marking the least volatility seen in nearly three decades. Experiencing only a marginal depreciation of 0.5 percent against the greenback, the rupee’s stability is attributed to the timely and active intervention by the RBI in the foreign exchange market.
The propellors
India’s inclusion in the GBI-EM Global Diversified index by JP Morgan, with a phased approach over ten months, is projected to bring in significant inflows, potentially totalling $25-30 billion. This inclusion is expected to contribute to the rupee’s strengthening against the US dollar.
Market expectations suggest that the current quarter might mark the bottom of the economic cycle, with optimism for an uptick in economic activities from the next quarter onward. The RBI’s anticipated rate cuts and favourable global factors contribute to this optimistic outlook.
The challenges
While most emerging market currencies regained ground against the US dollar in November, the Indian rupee lagged behind due to persistent demand for the dollar among importers. The record hit of 83.48 against the dollar on November 10 reflected this challenge. However, the expected inflows resulting from India’s inclusion in the JP Morgan bond index, starting in January, are anticipated to positively impact the country’s balance of payments.
The recent indication by the US Federal Reserve of potential interest rate cuts in 2024 has implications for India’s monetary policy. The RBI’s stance, interpreted as dovish in the last policy review, aligns with expectations of a potential rate cut following the Federal Reserve’s lead in May.
