Mumbai: The rupee capped off the week at its strongest level in four months, positioning itself as the standout performer among Asia-Pacific currencies in the early days of 2024. Increased inflows of US dollars, driven by India’s upcoming inclusion in global bond indices, coupled with a positive outlook on GDP growth, have enhanced the country’s allure.
In January alone, the rupee has appreciated by 0.4%, closing at 82.92/$1 on Friday, marking its strongest closing level since September 12, 2023, according to Bloomberg data. Despite a 0.6% weakening on a closing basis in 2023, the domestic currency has outpaced 11 other Asian currencies this month, benefiting from a resurgence in local equity markets.
The rupee’s resilience against the dollar persists amidst heightened geopolitical tensions, notably with the US and the UK launching military strikes against Houthi rebels in Yemen on Thursday.
Currency experts suggest that the rupee has further room for strengthening, driven by expectations of lower US interest rates in 2024, typically bolstering the appeal of emerging market currencies. Abheek Barua, chief economist at HDFC Bank, anticipates a trading range of 82.75/$1 to about 83.30/$1 for the rupee.
India’s attractiveness as an investment destination has likely been boosted by concerns over the Chinese economy’s outlook, marked by strain in the real estate sector and a patchy post-Covid recovery.
“India, along with some other Asian and perhaps a couple of Latin American currencies, is considered a safer emerging market bet, of which India clearly has a recognized strong growth story,” noted Barua.
Foreign portfolio investors have shown interest, with net investments at $1.1 billion up to January 11, as per NSDL data. The inclusion of domestic sovereign debt in JP Morgan’s EM bond index has attracted FPIs, who have purchased fully accessible bonds worth Rs 43,264 crore since September.
JP Morgan’s move is anticipated to bring in flows worth $20-30 billion, with the possibility of inclusion in Bloomberg’s EM index adding another $2-4 billion in support of the rupee amid global uncertainties.
Analysts predict that the Reserve Bank of India (RBI), having actively intervened to prevent sharp rupee swings, may allow gradual appreciation before stepping in to purchase US dollars around the 82.75/$1 mark.
Amid global political uncertainties, including elections in India and the US, the unexpectedly robust domestic economy, with the National Statistics Office estimating GDP growth at 7.3% in FY24, higher than the RBI’s projection of 7%, may provide a solid foundation for the rupee during periods of risk aversion.
