Indian Rupee Faces Marginal Depreciation amid Global Economic Shifts

In CY25, the Indian Rupee is likely to see slight depreciation due to FPI flow volatility and a strong U.S. dollar. Despite its 2.8% fall in CY24, the INR outperformed many peers. The RBI actively manages forex fluctuations, bolstered by India's robust forex reserves.

In 2025, the Indian Rupee is expected to face slight depreciation, influenced predominantly by the volatility in Foreign Portfolio Investor flows and a stronger U.S. dollar. A recent report from the Bank of Baroda highlights these trends. Despite a 2.8% depreciation in 2024, the Indian Rupee stood strong compared to many of its peers.

The Reserve Bank of India has been actively intervening in the foreign exchange market to manage currency fluctuations. As of December 2024, India's foreign exchange reserves reached USD 644.3 billion. This stability is attributed to favorable current account dynamics and reduced oil prices, which have provided support for the rupee.

The equity markets have seen a minor correction recently, but analysts remain positive about early 2025 performance due to expected earnings recovery. This optimism is driven by increased rural spending and government expenditures, which are anticipated to propel markets forward. Remarkably, the Sensex and Nifty 50 saw gains of 8.7% and 9% in 2024, with the Sensex even reaching an all-time high, crossing 85,500. The best-performing sectors included real estate, consumer durables, and IT, which drove substantial returns for investors.

Globally, equity indices wrapped up 2024 on a high, with major markets experiencing rallies. In the U.S., indices such as the S&P 500 and Dow Jones recorded double-digit annual gains, although uncertainties linger as investors look to policy directions under President-elect Trump. Potential inflationary pressures from the incoming administration create a clouded outlook for the bond market in 2025.

U.S. treasury yields marked a modest increase in 2024, closing up by 69 basis points above 4.5%. Despite mixed economic signals, the persistence of elevated yields implies ongoing inflation concerns. The Federal Reserve, having started a monetary easing cycle in September 2024, implemented rate cuts—its first in three years. However, with inflation in mind, it has scaled back on further cuts for 2025, anticipating two more reductions to settle the federal funds rate between 3.75% and 4%.

On the fiscal prudence front, the Indian government is keeping a tight rein by setting a fiscal deficit target of 4.9% of GDP and a gross borrowing plan of Rs 14 trillion for FY25. The Reserve Bank of India might reduce rates in February 2025 after maintaining a steady rate of 6.5% since February 2023.

(With inputs from agencies.)