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The Indian Rupee, which recently plummeted to an all-time low against the US dollar, is projected to experience a modest appreciation in the coming weeks, settling within the range of 85 to 86 rupees per dollar. This prediction, voiced by Deloitte economist Rumki Majumdar, hinges on the Reserve Bank of India's (RBI) continued commitment to maintaining stability in the domestic currency. Despite the RBI's interventions and the relative stability of the Indian currency compared to others, the previous expectation of the Rupee holding at 83-84 has been revised, reflecting the increased uncertainty in the global economic landscape. The recent volatility underscores the impact of several key factors including significant foreign fund outflows, a decline in domestic equity markets, and the strengthening US dollar.
The rupee's dramatic fall last week, reaching a historic low of 86.70 against the US dollar, highlighted the severity of the situation. This marked the steepest single-day decline in nearly two years, exceeding even the previous record fall of 68 paise witnessed in February 2023. This significant depreciation is largely attributed to the outflow of foreign institutional investor (FII) funds and a weakened domestic equity market, both contributing to negative investor sentiment. The cumulative depreciation of over 1 percent in 2025 builds upon a nearly 3 percent decline in 2024, further emphasizing the ongoing challenges. The strengthening dollar, fuelled by investor flight to safety in the lead-up to the US presidential transition, also significantly impacted the rupee's value. This flight to safety is evident in the rise of the dollar index from 97 to 108 over the past three months.
To mitigate the sharp volatility in the foreign exchange market, the RBI has actively intervened by selling US dollars, a strategy that has resulted in a decrease in India's foreign exchange reserves. These reserves have fallen from a peak of USD 704.88 billion in September to USD 625.871 billion by January 10th. While the RBI's actions aim to stabilize the rupee, the interventions come at the cost of depleting national reserves. The need to balance these two critical aspects is a key challenge the RBI is facing. Furthermore, the need for stability is emphasized by the needs of exporters who rely on predictable exchange rates for forward contracts. This underscores the delicate balancing act the RBI must undertake to manage currency fluctuations while maintaining adequate forex reserves.
The government's role in managing the rupee's decline is also a subject of debate. EY Chief Policy Advisor DK Srivastava suggests that the upcoming budget could incorporate higher tariffs on imports. The rationale behind this proposal is that increased import duties would curb the demand for dollars among importers, thereby helping to support the value of the rupee. This interventionist approach contrasts with the RBI's more market-oriented strategies and highlights a potential shift in governmental policy towards more protectionist measures. The effectiveness of such a measure remains to be seen, and it could have implications for consumer prices and international trade relations.
In conclusion, the future of the Indian rupee remains subject to a confluence of both domestic and global factors. While the RBI's interventions are aimed at stabilizing the currency, significant external pressures, including the strength of the US dollar and global investor sentiment, will continue to play a crucial role. The government's potential policy response, as suggested by the consideration of higher import tariffs, could further influence the trajectory of the rupee's value in the near future. The upcoming weeks and months will offer a critical test of the effectiveness of both the RBI's strategies and the government's policy considerations, with significant implications for the Indian economy as a whole.
Source: Rupee expected to appreciate a bit; to hover around 85-86/USD