A Volatile Rupee In 2025? Axis Bank's Chief Economist Neelkanth Mishra Warns

In its latest India Economic and Market Outlook 2025 report, Axis Bank’s Chief Economist, Neelkantha Mishra, forecasted increased volatility for the Indian Rupee (INR) in the coming quarters. Mishra highlighted that while the INR has exhibited remarkable stability throughout 2024, this trend is unlikely to continue in the new year due to a combination of global economic factors.

Record Low Volatility in 2024
The INR's stability in 2024 was characterized by exceptionally low implied volatility, which reached record lows and stood in stark contrast to other peer currencies. However, Mishra pointed out that the stability witnessed this year is not likely to persist. "The INR has been extraordinarily stable, but with significant volatility expected in the coming quarters, particularly due to US policies and the potential impact of a stronger-than-expected Chinese Yuan (CNY)," he explained.

Volatility Likely to Increase Amid Global Uncertainties
Mishra noted that the geopolitical and economic conditions, including potential shifts in US monetary policies and second-order effects from global currency fluctuations, will likely contribute to increased volatility in the INR. "Expecting a mild retracement of the USD in the coming year, though in volatile markets," he remarked, referring to potential changes in the strength of the US Dollar .

USD Strength and Stealth De-Dollarization
The report also touched on the broader dynamics of the global currency market, noting that the recent strength in the USD is partially due to USD borrowers repaying their loans, which Mishra referred to as "stealth de-dollarization." He added, "We continue to expect that the momentum of ECB rate cuts will likely soon be behind, even if neutral rates below the 2 per cent inflation target are actualized."
Mishra also speculated on the possibility of a new Plaza Accord-type agreement that could put downward pressure on the US Dollar. "The possibility of such a mechanism can keep the USD on the back foot," he suggested, hinting at possible coordinated interventions in the FX market.

Volatile Markets Ahead
Given the forecasted increase in volatility and potential global shifts in currency dynamics, Axis Bank's outlook for the INR points to a period of greater fluctuations ahead. Mishra’s insights reflect the bank's expectation that India's foreign exchange markets will be shaped by a mixture of domestic and international factors.