In the past four months, the Indian rupee has depreciated by around 4% against the dollar. The ongoing slide may continue due to factors such as the recent liquidity infusion measures announced by the RBI and the possibility of a rate cut. The INR is also under pressure from global factors like the broad dollar rally and FPI outflows. The recent tariff announcements by the Trump administration have added to the pressure on the INR. Both global and domestic factors will play a role in determining the future trajectory of the INR.
Global factors, including the dollar index and the depreciation of the Chinese yuan, will influence the movement of the INR. Any tariffs on Indian exports or a further depreciation of the yuan will negatively impact the INR. The markets expect these factors to ultimately lead to higher US inflation, higher rates, and a stronger dollar. The INR is expected to trend towards 88.00 in the coming months.
The RBI has been managing FX reserves judiciously to maintain stability in the INR. They are expected to continue intervening in the foreign exchange market to ensure that the INR remains competitive relative to its trade partners and to curb excess volatility.
Companies are bracing for rupee volatility and depreciation by increasing their hedge ratios. The recent sharp move in the INR has led to FX losses for some import-heavy industries, while IT companies have benefitted from the depreciation. Clients are using a mix of FX options and forwards to hedge currency risk, and hedge tenors are expected to be extended.
The recent FPI outflows from the debt market in January can be attributed to factors such as attractive US Treasuries yields, a compression in the spread between USTs and IGBs, and overall risk-off sentiment favoring developed markets over emerging markets.
The inclusion of India Fully Accessible Route (FAR) bonds in the Bloomberg EM Local Currency Government Index is expected to have limited impact on inflows and demand for Indian government securities from foreign investors. Incremental flows and yield impact are expected to be minimal.
Gold and silver have seen a good run in 2024, with gold facing near-term headwinds due to the new US administration’s economic policies. However, ongoing macro uncertainty and rising global debt levels may support increased investor exposure to gold. Silver has benefited from production discipline and demand from new applications like solar panels. Both metals are expected to see further gains in the future.
