Despite India’s economy projected to grow by 6.3% this fiscal year, making it the fastest growing economy globally, the Indian rupee is anticipated to trade near record lows against the dollar in the coming months. This prediction comes from a Reuters poll of FX strategists, who also believe that the Reserve Bank of India (RBI) will likely reduce its interventions to support the currency in the coming year.
RBI Role and Future Predictions
The rupee, which hit a record low of 83.29/$ earlier this month, has performed better than most of its Asian counterparts, thanks to the RBI’s regular interventions to prevent any abrupt fluctuations. It was down just 0.6% for the year. Despite the recent fall in U.S. Treasury yields and weaker-than-expected U.S. economic data weakening the dollar, the rupee is not expected to benefit significantly yet.
Impact on the Economy
With most major central banks likely done with their policy tightening cycles, analysts suggest that the dollar’s strong run over the past few years may be ending, reducing the pressure on the RBI to intervene in currency markets. Last month, RBI Governor Shaktikanta Das defended the regular use of its $586 billion in foreign exchange reserves, stating it was necessary to prevent excessive volatility.
A majority of strategists believe that the RBI’s intervention in the currency market will decrease over the coming year. This is expected to happen with a reversal of capital flows next year and a clearer trajectory of the Fed rate. If oil prices also don’t escalate further, the rupee rate is expected to stabilize.
Conclusion
While the depreciation of the rupee against the dollar presents challenges, the RBI interventions and the expected economic growth are positive signs for the economy. However, the situation requires careful monitoring to prevent any adverse effects on the economy.
