Navigating the Outlook for the Indian Rupee: CARE Ratings Analysis

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The Indian rupee is set to face some challenges in the coming months, according to a recent report by CARE Ratings. The primary factor contributing to these challenges is the hawkish stance of the US Federal Reserve, which has implications for the global currency market.

As of now, the rupee has already breached the Rs 83 mark against the US dollar, but the Reserve Bank of India (RBI) has been actively intervening in various markets, including the spot, non-deliverable forward (NDF), and futures markets, to stabilize the currency.

CARE Ratings predicts that in the second half of the fiscal year 2023-24, the USD/INR exchange rate will likely fluctuate within the range of Rs 82 to Rs 84. This projection is a departure from their previous forecast, which had a narrower range of Rs 81 to Rs 83. The report suggests that the rupee will gradually gravitate toward the lower boundary of this new range.

One of the key drivers of this prediction is the US Federal Reserve’s hawkish stance, which is expected to maintain elevated yields in the US Treasury market and support the strength of the US Dollar Index (DXY) in the short term. However, CARE Ratings anticipates that US Treasury yields will eventually moderate as the Federal Reserve signals that interest rates have peaked and as the US economy potentially shows signs of weakness in broader economic indicators.

Another factor affecting the currency market is the weakness in the Chinese Yuan, which is expected to persist until China implements substantial stimulus measures. This weakness is likely to put downward pressure on the currencies of other emerging Asian markets, including the Indian rupee.

On the economic front, tight supply conditions are expected to keep oil prices elevated in the near term. However, CARE Ratings foresees a moderation in oil prices in the absence of substantial stimulus from China and as the pace of economic growth in the United States begins to slow.

Despite these challenges, the report suggests that India’s current account deficit is expected to remain manageable in FY24. Additionally, Foreign Portfolio Investment (FPI) inflows are expected to recover, driven by India’s robust economic fundamentals and the eventual moderation of US Treasury yields and the DXY. The RBI is also expected to continue its interventions to mitigate rupee volatility and imported inflation.

In summary, the Indian rupee is likely to face some fluctuations in the coming months, with a projected exchange rate range of Rs 82 to Rs 84 against the US dollar. These fluctuations are influenced by global economic factors, including the Federal Reserve’s monetary policy, the Chinese Yuan’s weakness, and oil prices. However, India’s strong economic fundamentals and RBI’s interventions are expected to provide some stability to the currency.

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