Why is the Indian Rupee outshining all Asian currencies?

In the world of currencies, the Indian Rupee (INR) has emerged as a shining star, defying the odds and standing tall in the global financial landscape. Let’s delve into the intriguing journey of the INR through 2023 and its promising start in 2024.

Stability Reigns Supreme

The year 2023 was a period of exceptional stability for the Indian Rupee, experiencing the least volatility in nearly three decades. With a marginal depreciation of just 0.5% against the US dollar, it showcased resilience reminiscent of its 1994 performance when it appreciated by 0.4%.

RBI’s Strategic Intervention

Behind this stability lies the strategic intervention of the Reserve Bank of India (RBI), which is timely and adept in both buying and selling dollars. This proactive approach shielded the local currency from a potential dip, preventing it from weakening beyond Rs 84 per US dollar.

2024 Kick-Off

Entering 2024, the Indian Rupee started on a high note, surpassing its Asian counterparts. Despite a 2% rise in the dollar index, the INR appreciated by 0.1% in January, showcasing strength against the greenback. Meanwhile, other Asian currencies experienced depreciations ranging from 1.4 to 4%.

Bond Inclusion and Foreign Inflows

A significant contributor to the INR’s success has been the anticipation of foreign portfolio inflows, driven by the markets’ optimism regarding bond inclusion. In January, the domestic debt market witnessed a net inflow of Rs 15,793 crore, setting the tone for a positive trajectory.

JP Morgan’s decision to include India in its GBI-EM Global Diversified Index and the gradual increase in weight up to 10% by April 2025 further fueled confidence. Bloomberg Index Services Limited’s exploration of including India Fully Accessible Route bonds in the Bloomberg Emerging Market Local Currency Index adds another layer of potential growth.

US Dollar Dynamics

December 2023 witnessed a notable decline of over 2% in the dollar index, triggered by expectations of impending rate cuts by the US Federal Reserve. However, recent robust economic data led to a shift in expectations, with only 42% of traders now anticipating a 25 basis point rate cut in March, compared to the previous 75%.

RBI’s Defensive Moves

The Reserve Bank of India has played a pivotal role in capping any depreciation of the INR. While other Asian currencies are closely tied to the fluctuations in the dollar, the INR moves in the opposite direction. The central bank’s active stance, combined with significant capital flows, particularly in the debt segment, has created a scenario where the upside is limited, with occasional probes on the downside.

Forex Reserves and Future Outlook

As of January 19, 2024, India’s foreign exchange reserves stand impressively at USD 616 billion, according to the Reserve Bank of India. Market participants are optimistic about the INR’s further appreciation throughout the year, given the current economic landscape and the RBI’s vigilant posture.

Conclusion

In a world marked by financial uncertainties, the Indian Rupee’s story in 2023 and the promising beginning of 2024 serve as a testament to strategic central bank interventions, market confidence, and the allure of the Indian economy.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.