After Touching An All-Time Low, What’s Next for Rupee? All Details Here

The Rupee inched higher on Wednesday, recovering slightly from its record low of 84.64 against the US dollar. This minor recovery was partly due to gains in the Chinese yuan. However, a mix of domestic and global factors continues to drive the currency's depreciation. Moreover, the depreciation is broad-based, affecting not just the Indian rupee but almost every other currency.

Rupee Still Stronger
On Monday, Pankaj Chaudhary, the Minister of State for Finance, described the rupee as one of the best-performing Asian currencies despite geopolitical tensions and challenges. “The rupee depreciated by 1.4 percent until November against the US dollar. In contrast, other Asian currencies such as the Japanese yen and South Korean won fell by 8.8 per cent and 7.5 per cent, respectively, as of November 19, 2024,” Chaudhary remarked. His statement highlighted the comparative depreciation while also emphasizing the strong fundamentals of the Indian economy. Additionally, G10 currencies, except the British pound (GBP), depreciated by over 4 per cent during 2024.

The Main Drivers of Depreciation
The primary factor driving the rupee’s depreciation is the broader trend of a strengthening US dollar. Gaura Sen Gupta, Chief Economist at IDFC Bank, explained to Republic Business that the US dollar index rose by 4.8 percent by November 19, 2024, putting pressure on emerging market currencies, including the rupee. Sen Gupta further noted that while the rupee’s depreciation is due to global factors, it’s not an alarming trend as its pace of depreciation remains slower compared to other currencies. She attributed the depreciation to policies under the new US president, including expansionary fiscal policies and potential tariff changes. These could lead to imported inflation and higher bond yields, resulting in Foreign Portfolio Investment (FPI) outflows from emerging markets.

However, Arsh Monh, Chief Economist of Prabhudas Lilladher believes its mix of global and domestic factors is driving the depreciation. And recent GDP numbers of Q2 also have a role to play in it. As in Q2, the growth rate came out at 5.4 per cent far below projections hovering around 6.5 per cent owing to subdued growth in manufacturing and mining. Mogre believes that the pressure on the rupee will be there till the interest rate differential goes down after a rate cut by the RBI in February. 

Is Rupee Depreciation All Bad?

The depreciation of the Indian rupee is not entirely negative. According to the Reserve Bank of India’s October bulletin, the Real Effective Exchange Rate (REER) showed that the Indian rupee was overvalued by 7.21 percent, its highest in the last six years. An overvalued currency can hurt exports by making them more expensive. Gupta explained, “Given that the rupee is overvalued by 7.21 percent as per the REER, the depreciation is beneficial, as it corrects this overvaluation.”

What Lies Ahead for the Rupee?
As the US dollar strengthens, analysts expect the rupee to trade within the range of 85 to 85.50 by March 2025. Arsh Monh also predicts a range-bound movement for the rupee. “In the second half of 2025, the Reserve Bank of India (RBI) is likely to reduce interest rates in February, narrowing the interest rate differential and giving some support to the rupee. Additionally, as geopolitical tensions ease, the rupee is expected to trade in a more stable range,” Mogre stated. 

What is the RBI doing? 
The expectation is that the rupee will reach the 85 level in the coming months, and then the apex bank is likely to intervene to support the rupee by doing a dollar-rupee( buy/Sell swap) which is the option RBI resort to support the rupee without adversely impacting forex and liquidity in the markets.