December 29th 2024.
Mumbai: The Indian rupee had a tough year in 2024, falling by 3% due to concerns about slower economic growth and the strength of the US dollar. However, compared to other currencies, the rupee experienced relatively little volatility and experts predict that the coming year may be less challenging.
As the year came to a close, the rupee hit new lows against the dollar as the greenback's resurgence put pressure on emerging market currencies. Throughout 2024, the rupee's exchange rate was greatly influenced by a series of geopolitical events, including the Russia-Ukraine war, crises in the Middle East, trade disruptions in the Red Sea, and elections in major economies.
These global factors not only affected the rupee-dollar dynamics, but also disrupted the exchange rates of currencies in other emerging economies. Surprisingly, the rupee's decline against the dollar was not as steep as its depreciation against other currencies. In fact, the rupee even gained against the euro and the Japanese yen.
According to former governor of the Reserve Bank of India, Shaktikanta Das, the rupee has remained relatively stable compared to other emerging market currencies. However, the RBI has been actively trying to stabilize the rupee-dollar rate due to increased demand for the greenback, driven by India's reliance on oil imports and a widening trade deficit.
"NDF markets were actively intervened by the RBI to prevent sharp depreciation of the rupee," said Naveen Mathur, Director of Commodities & Currencies at Anand Rathi Shares and Stock Brokers. This was reflected in the decline of foreign exchange reserves, which went from a record high of USD 704.89 billion in late September to USD 644.39 billion by December 20, 2024 - the lowest level in six months.
These foreign currency assets also take into account the appreciation or depreciation of non-US units, such as the euro, pound, and yen, held in foreign exchange reserves. India faced external challenges as China's GDP growth slowed to 4.8%, reducing demand for Indian exports. In addition, tensions in the Middle East and the escalated crisis in the Red Sea caused supply chain disruptions, affecting the trade balance of several countries, including India.
The RBI's daily exchange rate log showed that the rupee depreciated by almost 3% against the dollar, going from 83.19 on January 1 to 85.59 on December 27. The rupee breached the crucial 84 level on October 10, surpassed Rs 85 to a dollar on December 19, and even hit an all-time low of 85.80 during intra-day trading on December 27 - the steepest single-day fall in nearly two years.
However, the rupee saw a gain of 8.7% against the Japanese yen, going from Rs 58.99 per 100 yen on January 1 to Rs 54.26 on December 27. In fact, since September 17, when the rate peaked at Rs 59.63 per 100 units of the Japanese currency, the rupee's gain has increased to almost 9%. Similarly, against the euro, the rupee gained over 5% since its lowest level of Rs 93.75 on August 27 to Rs 89.11 on December 27.
Experts attribute this trend to the unprecedented rise in the strength of the dollar, fueled by improved macroeconomic factors in the US, which prompted the Federal Reserve to take a slower approach to easing monetary policy, as well as the outcome of the Presidential election in the world's largest economy. President-elect Donald Trump's declaration of raising tariffs on Chinese imports caused concern among currency traders worldwide, leading to a constant demand for the greenback and the mass exodus of foreign capital from Indian equity markets.
"The US dollar outperformed the market with a 6.9% gain in 2024. The improvement in the US economy, weakness in Europe, and geopolitical concerns all contributed to the surge in the US dollar," said Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan. The rupee's most significant weakness was seen in the latter half of 2024, especially between October and December, driven by substantial Foreign Institutional Investor outflows, said Jateen Trivedi, VP Research Analyst at LKP Securities.
During this period, foreign investors withdrew around Rs 1.70 lakh crore, "which weighed heavily on the rupee's performance," he said. However, the outlook for the Indian currency next year is relatively stable, with projections ranging between 82 and 87 against the dollar, according to Ajit Mishra, SVP of Research at Religare Broking Ltd.
"A potential recovery may be supported by government policy measures and improvements in domestic economic growth," Mishra said. In 2025, several global events are expected to influence currency market trends. The most significant cues will come from the US Federal Reserve's interest rate decisions and President Donald Trump's trade measures, which could make Chinese imports more expensive, leading to inflation in the world's largest economy.
If the Trump administration takes an ultra-protectionist stance, it could disrupt global trade and capital flows, causing volatility across asset classes and currency markets, according to Anindya Banerjee, SVP and Head of Research for Currency, Commodity, and Interest Rates at Kotak Securities. India's economic growth, projected to be between 6.5-7.5% in 2025, could support the rupee, while the RBI's monetary easing to stimulate growth could have a negative impact on the currency.
"In 2025, we expect the rupee to fall to Rs 87/USD. The upside may be limited to Rs 83," said Choudhary of Mirae Asset Sharekhan, adding that China's long-awaited fiscal stimulus in the first half and an expected slowdown in the US economy in the second half could support the rupee later on.
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