6 reasons why Indian rupee could head towards 75/USD before 2025

The Indian currency has been depreciating at 3% per year since the last 20 years. With India posing as a manufacturing powerhouse with robust forex reserves, will this be enough to buck the trend? Inflation prints and real interest rates in India and those reported by the western economies have been converging which is of paramount importance in determining the course of INR. We forecast the rupee depreciation trend will reverse course and the currency will strengthen towards INR 75/USD within the next 2 years. This will be the biggest correction we have seen since 2013. A myriad of factors is aligning in INR’s favour. Here are the reasons why INR should strengthen: Current account deficit: India’s CAD has been on average -1.1% of GDP in the last 50 years. Oil which accounts for 30% of the country’s import bill, the commodity price has fallen by 45% from its highs. India’s positioning itself as a manufacturing powerhouse and as a result of exports should strengthen in the next 10 years. Technology giants like Apple have expressed difficulties in navigating the supply chain from China recently, and are taking nimble steps to shift to India. Three SKUs from the company alone are an export opportunity worth $50 billion for India. On a similar note, IT and BPO exports combined are forecast to reach $350 billion by 2026 according to NASSCOM; For comparison purposes, India’s overall exports in the fiscal year 2021 stood at $660 billion. Inflation differential narrowing: Inflation rate differential is a key factor driving interest rates and subsequently the currency exchange rate. It’s for the first time in the last 40 years, the inflation rate abroad, especially in the US has surpassed India’s CPI figure. Even if the differential turns positive (India’s inflation rate is above the US inflation rate), the regimen change has taken shape. The higher, more persistent, and positive the inflation figure is between India and the US, the faster the currency depreciation. However, today we are seeing the differential narrowing and even turning negative recently. This will be supportive for the INR. Interest rate differential: According to uncovered interest rate parity, the currency of the country with a higher interest rate tends to depreciate. During the last 10-year interest rates in India have been higher by 430bps in India and subsequently, we have seen the INR depreciate. Contrary to this, in the current scenario, interest rates in India have peaked whereas terminal interest rates are expected to approach 5.25% in 2023. This plunge in interest rate differential will appreciate the INR in the coming years. Economic Strength: Compared to developed economies, India is well positioned in terms of its debt repayment and servicing capacity. India has a debt-to-GDP ratio of nearly 84% which is in stark contrast to 128% of the US. India is forecasted to grow at 7% which positions itself as the fastest-growing economy in the world, a higher growth rate supports a stronger currency. In contrast, the US and the EU are expected to expand by 0.5%, let alone report a contraction resulting in a recession. India’s debt to GDP will continue to balloon as it emphasizes CAPEX and growth, however, the economy will support this debt by keeping interest rates capped. FII, FDI, and FPI inflow: With the advent of PLI and Atmanirbhar initiatives, FDI inflows are expected to exceed $100 billion for the year. FIIs and FPIs, especially as the dollar stabilizes, have been showing an appetite for the Indian markets. Considering the ambiguity with China and low growth prospects in other economies, we expect this FPI/FII trend to continue. The inflow of foreign money equips RBI with the firepower to quell currency depreciation and strengthens the INR. We are very positive about the FII, FDI, and FPI inflow India will witness and the subsequent currency appreciating this will result in. Fiscal Deficit: The last time we saw a positive fiscal balance was in the mid-1970s and has been negative since. Government expenditures will continue to trump revenues as capital expenditures are expedited. Since India is a developing economy, the fiscal deficit will continue to weigh down the INR as the government borrows more to fuel the economy and for social programmes. This element will weigh down the INR rather than aid in its recovery. A bilateral trade agreement mechanism is being discussed with several close trading partners which will lead to the dependence on USD for cross-border transactions slowly petering out. As the INR becomes an internationally accepted payment medium amongst the closest trading partners, the sentiments towards the INR will evolve in the right direction. Free Trade Agreements (FTA) are being negotiated with the EU, Australia, the UK and the GCC at the time of writing this article. Except with the UK, India maintained a current account deficit with the other two regions as per the latest reported data. For FTAs ​​to translate into a stronger rupee, we must be exporting more than importing from these countries and these FTAs ​​must help channelize investments in the form of FDI and FPI. Persistently maintaining a current account deficit (imports greater than exports) with these regions will hamper the currency rather than strengthen it. As of today, India is equipped with $550 billion of US treasuries (reserves) which is well above the $110 billion average daily turnover. The higher the reserves, the more stable the currency. Conclusion: Other factors like unemployment, equity market strength, volatility in crude oil prices, and money supply affect exchange rates. Nonetheless, the INR has several factors aligned in its favor, and as a result, we forecast the INR to strengthen by 2025. (The author is Vice President at Green Portfolio) (Disclaimer: Recommendations, suggestions, views, and opinions given by the Experts are their own.These do not represent the views of Economic Times)

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