Indian rupee can become a winner only if RBI loosens its grip on currency

By Subhadip Sircar

A heady year of capital inflows for India may only result in mild gains for the rupee as the nation’s central bank will likely continue to grip the currency tightly.

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On its own, the stars are aligned for the rupee — prospects of large bond and stocks inflows on the back of JPMorgan Chase & Co’s inclusion of Indian debt in its emerging market index as well as a global risk-on sentiment.

Yet analysts are reluctant to call a sizeably stronger rupee, which has traded within a very narrow range over the last year despite large inflows into India’s equity and debt markets. While the central bank seems to have eased a bit on its intervention lately — the rupee has turned into Asia’s top performer so far this month — limiting the swings in the currency may continue to be a prime focus.

“The Reserve Bank of India will let the rupee appreciate only gradually,” said Dhiraj Nim, economist and forex strategist at Australia & New Zealand Banking Group. “The RBI of late is allowing for a wider band, but volatility may remain contained at least relative to other currency pairs in the region.”

ANZ expects the rupee at 82.50 to a dollar by December, while Credit Agricole CIB is more bullish at 81. The projected gain, while modest from 2023’s close of 83.21, would still be the first appreciation versus the greenback in seven years.

India is expected to see a pick up in foreign direct and portfolio investment as well as offshore borrowings, led by easing in global financial conditions and robust economic growth, according to Gaura Sen Gupta, an economist at IDFC FIRST Bank Ltd. 

Goldman Sachs Group Inc. estimates overseas portfolio flows at $33 billion in 2024, up from $30 billion last year. Foreign direct investment may almost double to $36 billion, from an estimated $19 billion in 2023, the bank said in a recent note.

Yet, the monetary authority will have the last say.

The RBI has been among the most active among central banks in the forex market, as it continues to build reserves and tamp down rupee volatility. 

Forex Reserves

While the approach has helped foreign-currency reserves climb back to $617 billion after falling to a two-year low in 2022, the International Monetary Fund last month said the RBI’s intervention was excessive.

Governor Shaktikanta Das has been vocal about the need for emerging markets to bolster their reserves to deal with potential spillover risks. Last week, he pushed back against the IMF’s reclassification of India’s exchange-rate regime.

“Some people read it wrongly and call it a stabilized arrangement. But it is not justified, it is market determined,” Das said. 

“The RBI is unlikely to be influenced by IMF’s reclassification,” Citibank economists Samiran Chakraborty and Baqar Zaidi wrote in a note. “It will be interesting to see whether the RBI allows a little more intraday/intra month variability without sacrificing the broad currency stability objective.”

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