A record year for capital inflows into India may result in only minor gains for the rupee, as the country's central bank is likely to maintain its tight control on the currency. On its own, the rupee is benefiting from huge bond and stock inflows as a result of JPMorgan Chase & Co's inclusion of Indian debt in its emerging market index, as well as a global risk-on mentality.
Analysts, however, are hesitant to forecast a significantly stronger rupee, which has traded within a very narrow range over the last year despite significant inflows into India's equity and debt markets. While the central bank appears to have lightened off on its intervention recently — the rupee has become Asia's best performer so far this month - controlling currency volatility may remain a primary priority.
"The Reserve Bank of India will allow the rupee to gradually appreciate," said Dhiraj Nim, economist and forex strategist at Australia & New Zealand Banking Group. "The RBI of late is allowing for a wider band, but volatility may remain contained at least relative to other currency pairs in the region," he added.
ANZ forecasts the rupee at 82.50 to the dollar by December, while Credit Agricole CIB is more optimistic, forecasting 81. The expected rise, albeit modest in comparison to the close of 83.21 in 2023, would be the first in seven years.
According to Gaura Sen Gupta, an analyst with IDFC FIRST Bank Ltd, India is likely to see an increase in foreign direct and portfolio investment, as well as offshore borrowings, driven by easing global financial conditions and sustained economic development.
Goldman Sachs Group Inc. forecasts $33 billion in offshore portfolio movements in 2024, up from $30 billion last year. According to a recent report from the bank, foreign direct investment might nearly double to $36 billion by 2023, up from an expected $19 billion in 2023. Nonetheless, the monetary authority will have the final say. As it seeks to increase reserves and reduce currency volatility, the RBI has been among the most active central banks in the FX market.
Foreign Exchange Reserves
While the method has helped foreign-currency reserves recover to $617 billion after dipping to a two-year low in 2022, the IMF stated last month that the RBI's intervention was excessive.
Governor Shaktikanta Das has been outspoken about the necessity for emerging markets to build reserves in order to deal with potential spillover risks. He reacted angrily to the IMF's categorization of India's exchange-rate regime last week.
"Some people misinterpret it and call it a stabilized arrangement." But it is not warranted; it is dictated by the market," Das explained.
"The RBI is unlikely to be influenced by the IMF's reclassification," wrote Citibank economists Samiran Chakraborty and Baqar Zaidi in a note. It will be interesting to see whether the Reserve Bank of India allows a little more intraday/intra month variability without sacrificing the broad currency stability objective," he added.
