Indian rupee may face pressure in 2025 as strong dollar, geopolitics, and RBI interventions shape outlook

Rupee

The Indian rupee, which has been on a depreciating track for the last few weeks, is likely to remain under pressure in 2025 due to expectations of a strong dollar driven by the US Federal Reserve’s rate trajectory and US government policies under the new President, experts said.

Further, geopolitical tensions and the Indian Union Budget in February will be important factors influencing the rupee’s movement, they added.

“Exogenous factors are likely to play a greater role in the rupee’s weakness going ahead, particularly the Fed’s trajectory and the US government policies under the new President will be important. The odds are increasingly tilting towards a stronger dollar in 2025, which suggests that the pressure on INR will likely remain,” said Aditi Gupta, economist at Bank of Baroda.

Headwinds have increased for the Indian rupee in the last few weeks due to various factors such as outflows by foreign portfolio investors for equities, a strong dollar index, a likelihood of fewer rate cuts by the US Federal Reserve in 2025, India’s sluggish growth, and widened merchandise trade deficit.

Higher volatility has pushed the rupee to hit record lows every alternative day.

In the last two months, the rupee has depreciated to 85.6200 against the US dollar on December 31, down from 84.0837 on October 30.

The higher volatility in the rupee has forced the Reserve Bank of India (RBI) to intervene heavily both in spot and forward markets. This was evident from the sale of dollars in the forward market by the RBI in the last seven to eight months and a drop in foreign exchange reserves.

All this intervention has helped the Indian rupee to remain less volatile among its Asian peers so far in 2024. The rupee has depreciated 2.72 percent year-to-date, according to Bloomberg data.

Going ahead, experts believe that the central bank will continue to intervene in the currency market with a similar strategy to curb the volatility. Further, the RBI may allow the rupee to depreciate with shallow intervention if other Asian currencies continue to fall.

“If Asian currencies continue to depreciate, the RBI intervention may remain shallow and let the rupee depreciate in order to maintain export competitiveness. The RBI may intervene only to curb excess volatility if any,” said Kunal Sodhani, vice-president at Shinhan Bank.

Earlier today Moneycontrol citing forex experts reported that the central bank is unlikely to change its strategy of stepping into the currency market to ensure the stability of the rupee.

Even though the Indian currency has been under pressure and trading downhill for the last few days, it has depreciated only 2.74 percent year-to-date. The rupee features among the least volatile currencies in Asia which, according to currency experts, is because of timely and strategic interventions by the RBI.

Experts also added that the dividend paid by RBI to the government is not likely to be impacted due to rupee depreciation.

“The impact on RBI dividend is not likely to be much as lower interest income (on foreign currency assets) is likely to be offset by increased profit on dollar sales,” Gupta from Bank of Baroda added.

Further, Harsimran Sahni Executive, Vice President Head Treasury at Anand Rathi Global Finance said a depreciation of the rupee and appreciation in foreign assets could increase the RBI’s dividends and result in higher profit margins, provided the RBI maintains a sufficient cushion of foreign exchange to manage future volatility and unknown risks. Therefore, the depreciation could positively impact the RBI’s dividend and add to the government’s revenue.

Earlier this year, the central board of the RBI approved the transfer of Rs 2.11 lakh crore as surplus to the government for the financial year 2023-24. This is the highest-ever yearly surplus transfer to the government by the Indian central bank.