The Indian rupee saw its biggest single-day surge in nearly two years, surprising traders. However, analysts warn that the rally may not last as monetary easing and global market fluctuations put renewed pressure on the currency.
According to DBS Bank, the rupee could weaken to 88.8 per US dollar by mid-2025, while IDFC First Bank forecasts a decline to 89.50 by December. After its sharp rise on Tuesday, the rupee closed at 86.89 on Wednesday, marking a shift from its previously stable trajectory over the past two years.
RBI’s Intervention and Policy Shifts
Newly appointed Reserve Bank of India (RBI) Governor Sanjay Malhotra now faces the challenge of managing increased volatility in the forex market. Reports suggest the central bank intervened significantly this week, with estimates indicating nearly $11 billion in dollar sales over two days to curb speculation.
Despite this, analysts believe RBI’s large-scale support won’t continue indefinitely, as the central bank shifts its focus toward policy easing and boosting liquidity. With inflation hitting a five-month low in January, expectations of further interest rate cuts have strengthened.
Rupee’s Outlook Amid Global Economic Trends
Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corp, remains cautious about the rupee’s short-term performance. He noted that rate cuts and a more flexible approach to currency movements could allow for some depreciation in the rupee over the next three to six months.
The rupee’s sudden rally on Tuesday also fueled speculation about a strategic move by Indian authorities ahead of Prime Minister Narendra Modi’s upcoming visit to the US. A stronger rupee could help mitigate concerns over potential trade tariffs under a new US administration.
However, foreign investors have been pulling out of Indian equities, with nearly $10 billion exiting this year due to weaker economic growth and corporate earnings. The US Federal Reserve’s slower-than-expected rate cuts have also strengthened the dollar, adding further pressure on emerging market currencies like the rupee.
Limited Scope for RBI Intervention
Market data suggests that traders are not actively betting on a sharp appreciation of the rupee, with risk reversals showing an easing premium for protection against a stronger dollar. Some investors have already capitalized on the rupee’s gains, but broader market sentiment still leans towards further depreciation.
Adding to the complexity, India’s tight liquidity conditions may limit the RBI’s ability to intervene aggressively in forex markets. Increasing dollar sales to stabilize the rupee could further strain liquidity, prompting the central bank to adopt a more measured approach.
“Every policy decision has trade-offs, and one major downside of intervention is liquidity tightening,” said Michael Wan, senior currency analyst at MUFG Bank. “Ultimately, the RBI may have to let the rupee find a weaker equilibrium over time.”
As global economic uncertainties persist, the rupee’s trajectory will depend on RBI’s policy decisions, foreign investor sentiment, and the broader movement of the US dollar.
