The rupee is likely to trade in the broader range of 82 and 85 against the US Dollar in the year 2024 on account of visible upside risks and despite expected inflows from foreign investors, experts said.
Experts said foreign fund inflows are expected after the inclusion of government securities in the global bond index. At the same time, it is critical to watch what direction the interest rate trajectory will take considering the inflation numbers, other geopolitical tensions, and rising COVID cases in India, experts added.
“It will be important to watch how the rate cut trajectory plays out as compared to current expectations,” said Kunal Sodhani, Vice President at Shinhan Bank, India.
“Any spike in Covid cases, though as of now it seems to be mild, in case there are higher (number of) cases, then policymakers may have to re-think their strategy,” said Sodhani.
Explaining his point, Sodhani further added that typically the foreign investors’ inflows are forward-looking and discount everything in price before the actual event occurs.
Also read: Gold in 2024: Rate cuts, central bank buying, geopolitics, polls to unleash a bigger bull run
Geopolitical risks visible
Meanwhile, Dilip Parmar, a foreign exchange analyst at HDFC Securities said the inflation, interest rate scenario, Chinese recovery, and political and geopolitical compulsions impact the directional trend in the rupee.
“We expect the rupee to trade between 82 to 85 as the interest differential narrows and the economy continues to grow with moderate inflation,” Parmar added.
However, in the last few weeks, Covid cases in India have begun to increase sharply. India has logged 797 new cases of COVID-19, the highest in 225 days, while 4,091 active cases of the infection have been recorded, the Health Ministry said on Friday.
Cases are rising due to the new COVID-19 sub-variant JN.1. Market experts expressed concerns over this and said this could hurt the Indian rupee.
Positive cues
In its last policy review, the US Federal Reserve projected multiple cuts to interest rates in 2024 and beyond. Fed officials see core inflation falling to 3.2 percent in 2023 and 2.4 percent in 2024, then to 2.2 percent in 2025. Finally, it gets back to the 2 percent target in 2026.
Experts said if this scenario plays out, the rupee could appreciate and trade lower in the approaching months. This will be further aided by the anticipated $30 billion inflows from Foreign Portfolio Investors (FPI) after the inclusion of Indian bonds in the JPMorgan Government Bond Index-Emerging Markets.
On September 22, JP Morgan Chase & Co announced the inclusion of Indian bonds in the global bond index starting from June 28, 2024.
The move has significant implications for investors in India's debt market, with the country’s weight in the index going up to a maximum of 10 percent, and eligible government bonds valued at $330 billion, analysts said.
Further, according to Anil Kumar Bhansali, Head of Treasury & Executive Director, Finrex Treasury Advisors LLP, the dollar is expected to be soft in 2024 with the rate easing cycle and could give the rupee the necessary boost for appreciation in the coming year from around March 24.
Also read: Outlook 2024: Corporate chieftains highly bullish on India growth story
Movement of rupee in 2023
The Indian rupee depreciated around 0.7 percent in 2023, due to rate hikes by the global central bank and a higher dollar index. Additionally, the fall in the Chinese Yuan also contributed to the rupee depreciation, Sodhani said. “Concerns about a growing debt crisis in the country's sprawling property sector and sputtering economic recovery was pressurising the Yuan.”
In January 2023, the rupee appreciated from 82.80 against the US dollar to 81.12 against the US Dollar, data showed.
The Indian rupee hit an all-time low of 83.36 against the US dollar on November 24, 2023. It breached the 80 mark against the US dollar for the first time on July 19, 2022, and has since then hit a series of lows.
The Indian rupee traded within a broad range of 81.60-83.05 against the US dollar in the first half of 2023. Later, after July, it started depreciating. Parmar attributed it to the central bank absorbing the dollar by aggressive intervention in the forex markets to accumulate forex reserves.
Further, the Rupee had remained within a small range of 83 to 83.40 in the last three months. This is because the RBI has been buying dollars and selling them almost simultaneously since November 2023. There were inflows from FPIs for investment in the share market via IPOs/secondary market investment/debt which were absorbed by the RBI, taking reserves to $615.97 billion, Bhansali added.
Further, Bhansali said the US has been raising interest rates and withdrawing the Quantitative Easing or QE (which it had given in 2020-21) due to which most of the liquidity was going back to the US, creating a shortage of dollars.
In 2023, the Dollar Index, which gauges the greenback’s strength against a basket of six currencies, traded in the range of 99 and 108, falling over 2.5 percent in a year.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
