The rupee will depreciate by 3% in 2024 and is expected to recover gradually in 2025

Last updated:Dec 29, 2024 2:07 pm IST

The rupee fell 3 percent against the US dollar in 2024 as worries about slower economic growth and a stronger dollar weighed on global markets

In 2025, a number of global events are expected to influence trends in foreign exchange markets.

The rupee fell 3 percent against the U.S. dollar in 2024 as worries about slower economic growth and a stronger dollar weighed on global markets, but it was among the world’s least volatile currencies and headwinds could arise in the coming year be less strong.

The rupee fell to new lows towards the end of the year as the dollar’s revival weighed on emerging market currencies.

The eventful year of 2024 continued to impact the rupee’s exchange rate against major currencies, with a range of geopolitical events ranging from the Russia-Ukraine war and the Middle East crisis to trade disruptions in the Red Sea and elections in several major economies were enough.

Global factors, including measures taken by major central banks, have not only affected the dynamics of the rupee-dollar ratio but also disrupted the exchange rates of currencies across emerging markets.

In fact, the rupee’s decline against the dollar was less than its depreciation against other currencies. And in the end it gained against the euro and the Japanese yen.

Then-RBI governor Shaktikanta Das said in the central bank’s bi-monthly monetary policy in December that the Indian rupee had remained less volatile compared to its emerging market counterparts.

Still, the Reserve Bank of India has been more active in its efforts to stabilize the rupee-dollar rate, thanks to increased demand for the greenback due to India’s dependence on oil imports and the growing trade deficit.

“The RBI was also observed to actively intervene in the NDF (Non-Deliverable Forward) markets to prevent sharp depreciation of the rupee,” said Naveen Mathur, Director – Commodities & Currencies, Anand Rathi Shares and Stock Brokers.

This was evident in foreign exchange reserves, which fell from a record high of $704.89 billion at the end of September to $644.39 billion on December 20, 2024, the lowest level in almost six months.

Foreign currency assets also include the effects of appreciation or devaluation of non-U.S. entities such as euros, pounds and yen held in foreign exchange reserves.

India’s external challenges worsened as China’s GDP growth slowed to 4.8 percent and demand for Indian exports fell. In addition, supply chain disruptions due to tensions in the Middle East and the escalated crisis in the Red Sea weighed on the trade balance of several countries, including India.

The RBI’s minutes of daily exchange rate movements of the rupee against major currencies showed that the domestic currency depreciated by nearly 3 percent against the greenback from 83.19 on January 1 to 85.59 on December 27 this year, a record decline of 2 rupees equals in the last two months.

It broke the crucial level of 84 on October 10, crossed the Rs 85 per dollar mark on December 19 and even touched an intraday lifetime low of 85.80 on December 27, registering its sharpest intraday decline in almost two years.

However, the local unit recorded an 8.7 percent gain against the yen, rising from 58.99 rupees per 100 yen on January 1 to 54.26 rupees on December 27. Since September 17, the gain even increased to almost 9 percent when the rate touched a high of Rs 59.63 per 100 units of the Japanese currency.

The rupee also recorded an increase of over 5 percent against the euro from its low of Rs 93.75 per euro on August 27 to Rs 89.11 on December 27.

Experts attributed the trend to the unprecedented rise in dollar strength due to improving macroeconomic factors in the US, which prompted the Federal Reserve to ease monetary policy more slowly, as well as the outcome of the presidential election in the world’s largest economy.

President-elect Donald Trump’s stated intention to increase tariffs on Chinese imports spooked currency traders worldwide and triggered an unabated hunt for the greenback, leading to a mass exodus of foreign capital from Indian stock markets. “The US dollar outperformed the market with a gain of 6.9 percent in 2024.”

Improvement in the US economy, weakness in Europe and geopolitical concerns led to a rise in the US dollar, said Anuj Choudhary, research analyst at Mirae Asset Sharekhan.

Geopolitical tensions in the Middle East and the ongoing war between Russia and Ukraine kept demand for the US dollar as a safe haven, Choudhary added.

The most significant weakness in the rupee will be seen in the second half of 2024, particularly between October and December, due to significant foreign institutional investor (FII) outflows, said Jateen Trivedi, VP Research Analyst – Commodities and Currency, LKP Securities .

During this period, Indian stock markets witnessed FII outflows of around Rs 170 crore, “which weighed heavily on the rupee’s performance,” he said.

However, the outlook for the Indian currency next year is relatively stable and is expected to be between 82 and 87 against the dollar, said Ajit Mishra, SVP, Research, Religare Broking Ltd.

“An eventual recovery could be supported by government policy measures and improvements in domestic economic growth,” Mishra said.

In 2025, a number of global events are expected to influence trends in foreign exchange markets. The main clues are expected to come from the Federal Reserve’s interest rate moves and President Donald Trump’s trade actions, which are likely to make Chinese imports more expensive and stoke inflation in the world’s largest economy.

If the Trump administration adopts an ultra-protectionist stance, such an approach could disrupt global trade and capital flows and increase volatility across asset classes and currency markets, said Anindya Banerjee, SVP: Head of Research: Currency, Commodities and Interest Rates, Kotak Securities.

“Protectionist measures could lead to increased inflationary pressures in the US and force a reassessment of interest rate developments by the Federal Reserve. This could in turn impact global liquidity, emerging market currencies such as the Indian rupee and the broader economic outlook,” he added.

Domestically, the RBI’s monetary policy stance in view of the need to maintain inflation and growth balance as well as the government’s fiscal stance to be announced in the annual budget for FY26 are likely to influence the overall sentiment.

India’s economic growth, forecast between 6.5 and 7.5 percent in 2025, could support the rupee, while an easing of monetary policy by the RBI to boost growth could negatively impact the currency.

“In 2025, we expect the rupee to fall to 87 rupees/USD. “The upside may be limited to Rs 83,” said Choudhary of Mirae Asset Sharekhan, adding that China’s much-anticipated fiscal stimulus in the first half of the year and the expected slowdown in the US economy in the second half will support the rupee later.

(This story has not been edited by News18 staff and is published from a syndicated news agency feed – PTI.)