RBI's Protective Measures
The Reserve Bank of India (RBI) intervened in the market to support the Indian Rupee, a move that echoed similar actions taken in October and November.
According to a _Bloomberg_ report, the RBI bought $5 billion of dollars via a foreign-exchange swap on Tuesday. This intervention was aimed at preventing a sharp decline in the rupee's value. The central bank's actions, according to multiple reports, were crucial in helping the domestic unit rebound. These actions highlight the RBI's proactive approach in managing currency fluctuations and maintaining stability in the market. The central bank's role in this context is to prevent excessive volatility and ensure the currency's value is within an acceptable range. Its interventions are a strategic response to market pressures and designed to safeguard the rupee's stability.
Recent Market Dynamics
The Indian Rupee recently concluded a trading session 0.7% higher against the US dollar, which was the most significant single-day gain in two months. This marked a shift from a five-day losing streak, with the rupee closing at 90.38 per US dollar, a significant improvement from its previous close of ₹91.0275. Despite this recent rebound, the rupee has still been the weakest-performing Asian currency this year, shedding over 6% against the US dollar. Factors contributing to this include ongoing uncertainties in the India-US trade deal negotiations and consistent portfolio outflows. This volatility underscores the impact of global and domestic economic forces on the rupee's performance, emphasizing how various market drivers can influence its fluctuations.
Expert Insights and Forecasts
Analysts offer varied perspectives on the rupee's future. Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, suggests that the sustainability of the rupee's recovery remains uncertain. This is mainly due to the ongoing ambiguity surrounding the India–US trade deal and continued Foreign Institutional Investor (FII) selling. Trivedi anticipates continued volatility, with the rupee possibly trading within an 89.80–90.80 range. N. ArunaGiri, CEO of TrustLine Holdings, believes there is limited scope for further sustained depreciation based on Real Effective Exchange Rate (REER) metrics. He suggests the rupee is more likely to stabilize and gradually normalize rather than remain under pressure. These contrasting views highlight the complexities of forecasting currency movements, emphasizing the importance of considering multiple factors and expert opinions.
Valuation and Potential
Historically, the Indian Rupee has traded in a mildly overvalued REER range, typically around 102–103. The rupee reached a peak close to 108 in late November 2024, reflecting overvaluation. However, the rupee is currently trading in the 98–100 REER range, indicating it is now fairly valued. If conditions improve, the rupee could retrace by 2–3%, moving back towards its historical REER range of 102–103 over time. A reversal in FPI flows, progress on trade negotiations, or selective RBI intervention could drive this trend. This perspective on the valuation suggests that the current market movement may be somewhat overdone. The potential for the rupee to regain some ground exists and depends on various economic and market developments.
