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These aforementioned support and resistance levels will remain sacrosanct for the Reserve Bank of India (RBI) and the Central Bank will likely keep the pair within this range to ensure all-round stability.
However, RBI has already said that it can manage huge inflows with ease which means it will be able to buy dollars and ensure that appreciation is not beyond a certain level. Similarly, with a lot of outflows related to oil, defense and government debt repayment/corporate repayments happening the bidding of $ would also be there and that should keep the upside intact with RBI again stepping in to intervene. So expect the rupee to be in the above-defined ranges for the year ending 2025.
The Indian Rupee was at 73.77 on January 11, 2022, a month before the start of the Russia-Ukraine war after which the level was never seen. After this, the rupee has been declining steadily. It made a low of 83.48 in October 2022. Since then, the rupee has remained in a band of 80.50 to 83.50. The band was further narrowed to 82.50 – 83.50 as RBI intervened from both sides during the period October 2023 to April 2024.
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From the above charts, one can see that the $ index has fallen off its highs of 114.78 and is now hovering near 104.50 and has been in a range of 107.34 to 100.61. It lost strength when talks of 6-7 rate cuts in $ in 2024 with the first being in March 2024 were discounted by the market. It gained when the talks of rate cuts in June 2024 subsided and now the rate cuts could come on towards the end of 2024 due to the continued strength of the US economy.China being our main competitor in respect of exports we can see how the Yuan has weakened from 6.30 to 7.40 and has been in a range in the past 6 months. The Indian currency has strengthened against the Yuan from 12.24 to 11.50 currently with the highest being 11.20 in July 2023 because of the relative strength of the Indian economy as compared to the Chinese Economy. Overall from above we can see that currencies have weakened against the dollar in the last two years but have been range-bound in the last 6 months as talks of rate cuts in each of the economies continue. Accordingly, the rupee has been range-boundIndia wants to export $2 trillion of goods and services to various countries by 2030. For achieving competitive exports the rupee has to be on the weaker side as exporters gain from a weaker currency. Also, it wants to curb imports by more domestic production so that the trade balance falls to a respectable level. A stronger rupee will do the reverse, which is to increase imports and decrease exports. A weakened rupee will not attract foreign investors as they lose out on currencies that they gain from investments.
The RBI has therefore ensured that the rupee remains stable. Our CAD/GDP ratio has fallen from 2.8% last year to about 1.2% this year. Our Government bonds have been included in the JP Morgan index as well as the Bloomberg bond index while FTSE has deferred the same, keeping the same in its watch list. This will bring an annual $40 billion of additional funds to be invested in the country bonds starting from June 28, 2024, for JPM and January 28 2025 for Bloomberg. So investments will gallop.
FPIs have been at the forefront of investing in equities and in the current year have invested in debt also. So inflows will move up and RBI will keep absorbing them. There are occasions when demand is more than supply, particularly from oil companies, and government demand but generally, these are occasions to sell the $.
Importers are also getting chances to hedge their imports as the rupee hovers between 82.50 to 83.50. So a stable currency in the next one year will keep CAD balanced, FPIs chances to invest and hold to their investments and exporters and importers to hedge their receivables and payables respectively. With occasional ups and downs rupee should broadly remain in the above range for the next 6 months excluding the happening of a black swan event.
A cut from FED is still out of the horizon and when it comes we will review it. Oil prices are the bone of contention but we hope that good sense will prevail in the coming months regarding the two wars and OPEC+ and will keep them in ranges of 70-95 to ensure a balanced approach.
Rupee Impact
A range-bound rupee will allow exporters and importers hedging opportunities at appropriate levels while foreign inflows will get a boost with a steady rupee. FPIs like a stable currency rather than one that is volatile.
A stable rupee will keep a tab on inflation as commodities prices due to rupee remain stable. A depreciating rupee increases costs which impact the common man the most.
A stable rupee will also keep the cost of borrowing foreign currencies lower than a depreciating rupee. Borrowers can repay principal and interest with less impact on their P&L.
For markets obviously a stable rupee does not give trading opportunities but a 60-70 paise movement is a good opportunity for increased volumes.
(The author is Head of Treasury and Executive Director at Finrex Treasury Advisors LLP)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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