New Delhi [India]: The Indian rupee is likely to experience a robust recovery once prevailing global market uncertainties stabilize, according to a report released by the State Bank of India (SBI).
The report draws historical parallels to the 2016-2017 period, during which the rupee rebounded strongly after a phase of volatility. It emphasized that while the Dollar Index (DXY) could continue its upward momentum in the near term, the rupee is poised for a significant bounce-back once the current turbulence subsides.
The Dollar Index (DXY), which measures the value of the US dollar against a basket of major foreign currencies, has been bolstered by several factors, including global financial flows favoring the United States and pro-economic growth policies like the “Make America Great Again” agenda. However, the report cautioned that the rising DXY is putting pressure on emerging market (EM) currencies, including the rupee.
Challenges for the Rupee and Emerging Markets
The SBI report highlighted the potential risks posed by a volatile US job market, inflationary pressures due to tariff policies, and a possible “Tariff-Tax spiral,” which could harden US benchmark yields further. These factors, combined with a strong dollar, have created challenges for emerging market currencies and increased volatility.
The weakening of EM currencies is compounded by global financial dynamics. For instance, the Euro-Dollar parity is now a consideration for major global banks, further underscoring the impact of the strengthening dollar on global trade and currency markets.
Domestic Economic Indicators
Domestically, the rupee’s challenges are mirrored by an increase in India’s currency in circulation (CIC), which has risen by ₹78,000 crore in the current fiscal year, reaching approximately ₹35.9 lakh crore, or 11% of the nation’s GDP.
Additionally, the Reserve Bank of India (RBI) has been actively intervening in the forex market to stabilize the rupee. As of November 2024, the RBI’s net forex sales surpassed ₹1.7 lakh crore, a figure that has likely increased further.
“Net sale of Forex is ₹1.7 lakh crore till Nov’24, and we believe the same would have comfortably passed ₹1.7 lakh crore (incrementally) at least as on date given the decelerating rupee,” the report noted.
A Glimmer of Hope
Despite these challenges, the SBI report expressed optimism about the rupee’s recovery prospects. It noted that the worst may soon be over for the Indian currency as global economic uncertainties diminish and market conditions stabilize.
The report’s outlook offers hope for India’s economy and currency, which have been navigating a challenging macroeconomic landscape characterized by global volatility and domestic fiscal pressures.
The rupee’s anticipated recovery would not only enhance investor confidence but also strengthen India’s position in global trade and financial markets.