Indian rupee breached the 86 mark for the first time in history on risk aversion in global markets and a strong US dollar. This fall is likely to benefit the exporters from India, but at the same time, it needs to be observed that India is an import-dependent economy as it is one of the biggest imports of crude oil.
Weakness in the rupee is likely to dent the import bill further. India’s trade deficit may widen. Experts point out that the Indian economy is likely to witness a sliding rupee in 2025, with levels touching as low as 85 to 86 to a dollar as the Reserve Bank of India is now possibly loosening the hold on its fall.
Last year, the RBI intervened to manage volatility at the expense of domestic liquidity and foreign exchange reserves. With GDP forecasts of 6.5 per cent in FY 2025, it is imperative for the government to now boost the banking liquidity systems and push for further exports to improve the situation.
Indian exporters are expected to have a gala time in the Indian economy. With all the other emerging market economies exporting at relatively more depreciated currencies, Indian exporters will get pushed by a further fall of the Indian rupee.
“The government would have to manage inflation, but it will most likely not compromise on the demand side and focus more on the supply side of business, improving supply chains of fruit, vegetables and other frequently used commodities. The external headwinds are also not favourable for the rupee as US trade policies are uncertain and the Fed is likely to manage dollar strength through policy rates. The transition in US presidential leadership is going to create some volatility for the currently overvalued rupee as RBI now allows the market forces to accelerate the rupee’s fall,” remarked Ritu Srivastava, Assistant Professor, SBM NMIMS Navi Mumbai.
The US Dollar index rallied on Friday, nearing the 110 mark amid a blowout non-farm payrolls report. The report showed that the US added 256,000 jobs in December 2024, compared to estimates of 164,000 jobs.
The unemployment rate fell to 4.1 per cent in December vs the forecast of 4.2 per cent. According to a University of Michigan survey, US consumers expect 1-year inflation to jump to 3.3 per cent in January 2025 vs 2.8 per cent in the previous month.
This raised expectations that the US Federal Reserve may not hike interest rates in its FOMC meeting in January. Markets also lowered 2025 rate cut expectations to just one rate cut this year, down from two rate cuts previously expected.
The US Treasury yields jumped after the release of the jobs report, with the 10-year yields rising to 4.7881 per cent.
“China’s Central bank suspended its open market purchases of government bonds, which, too, supported the US Dollar. Global crude oil prices surged by nearly 4.8 per cent after the US imposed sanctions on Russia’s oil industry, specifically measures targeting two firms that handle more than a quarter of Russia’s seaborne oil exports. Global equities fell due to risk aversion. Asian currencies, too, weakened amid strong dollar and risk aversion in the global markets,” pointed out Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan.
It is a well-known fact that India is an import-dependent economy as it is one of the biggest imports of crude oil. Weakness in the rupee is likely to dent the import bill further. India’s trade deficit may widen.
However, a weak Rupee is beneficial for exporters. At the same time, the Indian IT services companies would also benefit from the rising dollar versus the Indian Rupee as it would provide better margins for the IT services in the year 2025.
“We expect the rupee to remain weak in the near term amid rising geopolitical tensions after the US imposed sanctions on Russian oil. Rising odds of a no-rate cut by the Fed in January may support the US dollar and put pressure on global equities, which could further weigh on the rupee. A weak tone in domestic equities may result in further outflows from capital markets by FIIs. However, RBI will continue intervening in the forex markets, which could prevent the pace of depreciation in the rupee. In the near term, we expect the rupee to trade in the range of 85.80-87.20,” added Choudhary.
