Representative image showing Indian Rupee and US Dollar.
Credit: PTI File Photo
New Delhi: The rupee, which is currently hovering around 84 against the US dollar, is likely to strengthen to 80 by the end of 2025, as both the yield and growth gap are expected to be in favour of the Indian currency, BMI, a unit of Fitch Solutions, said on Wednesday.
By the end of the 2024 calendar year, the rupee is estimated to strengthen to 81.5 per dollar.
However, there are two major risks. One is the rise in India’s current account deficit and the other is escalation in the West Asia conflict.
“The steady escalation of the conflict between Israel and Hezbollah is a key downside risk to our forecast. A full-blown regional conflict that draws in Iran would probably trigger a selloff of riskier EM currencies like the rupee,” BMI said in the report.
“Furthermore, the likely spike in oil prices would cause the current account deficit to widen even more,” it added.
The rupee had been regularly testing the support at 84 per dollar before rallying, after the US Federal Reserve kicked off its rate easing cycle with a 50 basis points cut, to trade at 83.8 against the dollar, as of October 1.
“The rupee should strengthen as interest rate differentials move in its favour in the coming weeks,” BMI said.
The Fed is likely to lower the rate further by 75 basis points by the end of 2024, implying a total cut of 125 basis points, while the Reserve Bank of India is expected to cut the policy rate by only 25 basis points this calendar year
“The RBI has signalled that it will continue to take a cautious stance on monetary easing due to the potential for a rebound in inflation. We think inflation will rise to around 5% by year-end, from 3.7% in August,” BMI said.
“The 10-year yield advantage the rupee enjoys over the dollar should widen, and that has been historically correlated with a stronger rupee,” it added.
The policy rate differential between the US and India is likely to widen by another 75-100 bps in 2025 that would lead to further strengthening in the value of the Indian currency.
The gap in economic growth is another key factor that would help in appreciation of the value of the Indian currency. India’s economic growth, as per BMI, is estimated to decline slightly to 6.7 per cent in 2025-26 from around 7 per cent projected for the current financial year, while the US economy is likely to witness a sharper slowdown falling from 2.5 per cent in 2024 to 1.5 per cent in 2025.