Rupee expected to remain weak versus dollar. Near term range at 82.50-84.20

The Indian Rupee hit all-time lows of 83.4550 this week on a strong US Dollar and FII outflows. The Dollar index has strengthened 2.87% YTD while FII outflows stood at Rs 52,461 crores YTD. Elevated gold and crude oil prices due to heightened geopolitical tensions in the Middle East and between Ukraine and Russia also pressurised the rupee. Another factor which dented the Rupee is falling Chinese Yuan which depreciated 2% in 2024 amid expectations of monetary easing by the world’s second largest economy.

The rupee witnessed some relief after the MPC maintained status quo in its monetary policy, maintaining its stance of ‘withdrawal of accommodation’. RBI also kept its inflation and growth rate projections unchanged at 4.5% and 7% respectively for FY 2024-25.

We expect the rupee to remain weak as the US Dollar is likely to remain strong on safe-haven demand amid geopolitical tensions between Israel and Iran and hawkish comments from Federal Reserve officials. Any further aggression in the Middle-East, or if the tensions between Israel and Iran escalate, extending to other parts of the Middle East, could flare up crude oil prices further. Brent crude oil prices have breached the $90 per barrel mark. Some Fed officials have trimmed rate cut projections to two rate-cuts in 2024. Some officials also contemplated no-rate cuts if inflation remained sticky. The US economy continues to remain resilient which has been seen by rising GDP and a tight labour market. External factors such as weak Yuan and crude oil prices remain beyond India’s control. Rising commodities prices such as gold and crude oil could impact India’s import bill, thus putting additional downside pressure on the domestic currency.

The domestic fundamentals continue to remain strong with manufacturing PMI at a 16-year high and composite PMI at 8-month high. Narrowing CAD and rising FPI inflows also supported the Rupee. Though India’s core inflation has softened, we need to be cautious over any spike in food prices. IMD has forecast a harsh summer. India is likely to witness a good to abundant rainfall this monsoon on expectations of La Nina conditions. Further, Rupee could also remain volatile ahead of the upcoming Lok Sabha elections results. Though there is a pro-incumbency factor in play, any surprise results could impact the Rupee. India’s forex reserves jumped to a record high $645.58 billion as of March 2029, which provides the RBI enough leg-room to manage volatility in the Rupee, if required. In the near term we expect Rupee to remain in the range of 82.50-84.20.

(The author, Anuj Choudhary, is Research Analyst at Sharekhan by BNP Paribas)

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