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A potential risk to the rupee's appreciation trajectory lies in the event of a delay in the Federal Reserve's rate cut cycle, particularly if core inflation in the US remains elevated.
The rupee, having depreciated 0.6 per cent against the US dollar in March, so far, is likely to rebound in April, largely on the back of foreign inflows ahead of India's government bond inclusion in JP Morgan's Government Bond Index-Emerging Markets (GBI-EM), set to begin at the end of June 2024.
By the close of April, the local currently is projected to hover around the 83 per dollar mark, according to a Business Standard poll of nine respondents.
"In the near term, dollar strength could persist with the risk of Federal Reserve rate cut getting delayed if core inflation in the US remains firm," said Gaura Sengupta, economist at IDFC First Bank.
"The sharp upward move in the USDINR (on March 22) reflects the impact of dollar strength resurfacing," Sengupta added.
"That said, we expect INR appreciation in FY25 with a pick-up in capital inflows with India's inclusion into the JP Morgan EM bond Index. Moreover, the current account deficit is expected to be moderate in FY25, assuming crude oil price averaging at $85 per barrel."
On Friday, March 22, the Indian rupee hit a new low of 83.43 against the US dollar, a result of weakness among its Asian counterparts and sustained demand for dollars from local importers.
While domestic fundamentals remain robust, external factors continue to exert pressure on the Indian currency.
In the current financial year, the rupee has depreciated by 1.5 per cent, and by 0.3 per cent in the current calendar year.
It fell 7.8 per cent in the previous financial year (FY23). In CY23, the Indian currency experienced a marginal depreciation of 0.6 per cent against the greenback, marking the least volatility seen in nearly three decades.
Abhishek Goenka, CEO at IFA Global, expects a steady influx of passive inflows into debt markets as the bond index inclusion nears implementation.
"Inflows into the bond markets are already on the course to be positive for 12 consecutive months in this financial year," Goenka said.
"We expect overseas borrowing-related flows to pick up as it is now clear that the Federal Reserve is done with its rate hikes and rate cuts seem to be on the horizon," Goenka added.
India's foreign exchange reserves, according to the latest Reserve Bank of India data, stand at a record high of $642.49 billion.
This covers nearly 11 months of projected imports for 2023-2024 and over 100 per cent of total external debt outstanding at the end of September 2023.
Foreign exchange reserves act as a shield for the exchange rate during periods of volatility.
"Moreover, we expect the RBI to continue to wield significant influence over volatility in Rupee with the kind of forex reserves it now possesses," Goenka said.
"We expect the broader dollar to weaken gradually and therefore, we do not see the rupee depreciating considerably from current levels," Goenka further said.
For the financial year 2024-2025, the rupee is projected to trend upwards, primarily due to a substantial balance of payments surplus and an anticipated cycle of rate cuts by the Federal Reserve.
Also, foreign portfolio investment (FPI) inflows into the debt markets are set to receive a boost with India's inclusion in the JP Morgan EM bond index, slated to commence by the end of June 2024.
Foreign direct investment (FDI) and external commercial borrowings (ECB) are also expected to increase once the Federal Reserve initiates its rate cut cycle.
However, a potential risk to the rupee's appreciation trajectory lies in the event of a delay in the Federal Reserve's rate cut cycle, particularly if core inflation in the US remains elevated.
The US Federal Reserve retained its projection for three rate cuts through 2024 in its meeting last fortnight.
By the end of the first quarter of 2024-2025, the majority of participants anticipate the rupee to appreciate further toward Rs 82.50 per dollar.
"By the end of the first quarter, we anticipate the rupee to align more closely with its underlying fundamentals," said Amit Pabari, managing director at CR Forex.
"With India boasting the title of the fastest-growing economy globally, coupled with indicators -- such as stable inflation and robust manufacturing and services PMI -- alongside a favorable environment for both FPI and FDI flows, there appears to be no significant rationale for the rupee to linger near its all-time lows."
Feature Presentation: Ashish Narsale/Rediff.com
