New Delhi [India], January 2 : The Indian Rupee (INR) is projected to experience marginal depreciation in CY25, primarily due to ongoing volatility in Foreign Portfolio Investor (FPI) flows and the likelihood of a stronger U.S. dollar, according to a Bank of Baroda report.
Despite depreciating by 2.8 percent in CY24, the INR outperformed many of its global peers. The Reserve Bank of India (RBI) has actively intervened in the forex market to manage fluctuations. India’s foreign exchange reserves stood at USD 644.3 billion as of December 20, 2024, supported by stable current account dynamics and lower oil prices, which have provided some stability for the rupee.
While equity markets have recently seen a slight correction, analysts remain optimistic about their performance in early 2025, bolstered by expectations of a recovery in earnings. This recovery is expected to be driven by increased rural spending and higher government expenditures, which could further boost market sentiment.
In CY24, the Sensex and Nifty 50 performed exceptionally well, rising by 8.7 percent and 9 percent respectively, with the Sensex reaching an all-time high of over 85,500. Sectors like real estate, consumer durables, and IT led the growth, delivering strong returns to investors. Globally, major equity indices also saw a broad rally, with the S&P 500 and Dow Jones posting double-digit gains.
However, some uncertainty remains as investors await policy shifts under the incoming U.S. administration, which could present new risks. Meanwhile, the bond market outlook for CY25 remains uncertain due to potential inflationary pressures, especially with mixed economic signals in the U.S. US treasury yields ended CY24 modestly higher, signaling persistent inflation concerns.
The Federal Reserve, after initiating a monetary easing cycle in September 2024, has slowed further rate cuts, with only two more expected in CY25. In India, the government is maintaining fiscal prudence, targeting a fiscal deficit of 4.9 percent of GDP and a gross borrowing target of Rs 14 trillion for FY25. The RBI is also anticipated to consider a rate cut in its February 2025 policy meeting, having kept rates on hold at 6.5 percent since February 2023.