Rupee may be winner only if RBI eases hold

NEW DELHI: A heady year of capital inflows for India may only result in mild gains for the rupee as the nation’s central bank will likely continue to grip the currency tightly.

On its own, the stars are aligned for the rupee – prospects of large bond and stocks inflows on the back of JPMorgan Chase & Co’s inclusion of Indian debt in its emerging market index as well as a global risk-on sentiment.

Yet analysts are reluctant to call a sizeably stronger rupee, which has traded within a very narrow range over the last year despite large inflows into India’s equity and debt markets.

While the central bank seems to have eased a bit on its intervention lately – the rupee has turned into Asia’s top performer so far this month – limiting the swings in the currency may continue to be a prime focus.

“The Reserve Bank of India (RBI) will let the rupee appreciate only gradually,” said Dhiraj Nim, economist and foreign exchange (forex) strategist at Australia & New Zealand Banking Group (ANZ).

“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.”

ANZ expects the rupee at 82.50 to a US dollar by December, while Credit Agricole CIB is more bullish at 81.

The projected gain, while modest from 2023’s close of 83.21, would still be the first appreciation versus the greenback in seven years.

India is expected to see a pick up in foreign direct and portfolio investment as well as offshore borrowings, led by easing in global financial conditions and robust economic growth, according to Gaura Sen Gupta, an economist at IDFC FIRST Bank Ltd.

Goldman Sachs Group Inc estimates overseas portfolio flows at US$33bil in 2024, up from US$30bil last year. Foreign direct investment may almost double to US$36bil, from an estimated US$19bil in 2023, the bank said in a recent note.

Yet, the monetary authority will have the last say.

The RBI has been among the most active among central banks in the forex market, as it continues to build reserves and tamp down rupee volatility. — Bloomberg