India in much better situation to manage current currency challenges: Bank of Baroda

Currency Challenges: The Indian rupee is expected to remain under pressure in the near term, trading in a range of 84-84.5 per US dollar, according to a report by Bank of Baroda.

The report attributed the weakness in the rupee to two key factors which include the foreign portfolio investor (FPI) outflows and the strengthening of the US dollar.

It said "Indian rupee is likely to remain under pressure in the near-term. This is due to two inter-related factors outflows and dollar strength".

Optimistic About Rupee's Long Term Prospects

Despite this short-term pressure, the report expressed optimism about the rupee's prospects in the medium to long term. It highlighted that India's macroeconomic fundamentals remain strong, which positions the country well to manage the current challenges.

"Capital flight from the domestic market is not unheard of historically. However, this time India is in a much better shape to deal with the situation" the report added.

While capital outflows from the domestic market have occurred before, the report noted that India is better equipped this time to handle the situation. The external and fiscal deficits are under control, and economic growth remains robust.

Healthy Foreign Exchange Reserves

Additionally, the Reserve Bank of India (RBI) has built a healthy foreign exchange reserve of over $675 billion, which it is likely to use strategically to stabilize the domestic currency.

The report further suggested that the recent outflows of FPIs are a temporary phenomenon. It projected a positive turnaround in FY25, with net FPI inflows expected to reach $20-25 billion during the financial year.

On the trade front, India's trade deficit rose in October 2024. However, strong services exports and remittances are expected to keep the current account deficit (CAD) under control.

Overall, the report emphasized India's resilience, supported by strong

macroeconomic fundamentals, and predicted a brighter outlook for the rupee in the medium to long term.