Rupee Faces Pressure Amid Strong Dollar

The Indian rupee is under significant pressure as it approaches the 86 mark against the US dollar. This situation presents a major challenge for the newly appointed Reserve Bank of India (RBI) Governor Sanjay Malhotra. The strengthening dollar is impacting the rupee’s value, which could hinder India’s economic growth. Experts predict that the country’s GDP growth may slow to 6.4% in the fiscal year 2025. The ongoing fluctuations in the currency market raise concerns about the effectiveness of monetary policy and the overall economic outlook.

The Impact of a Strong Dollar

The recent rise of the US dollar has been a key factor in the rupee’s decline. According to Aditi Gupta, an economist at Bank of Baroda, the rupee has been hitting lifetime lows in recent sessions. The pressure on the currency is exacerbated by inconsistent foreign portfolio investment (FPI) inflows. Investors are wary of the uncertainty surrounding US interest rates and government policies, which keeps the dollar strong. This situation is expected to persist in the near term, making it difficult for the RBI to implement lower interest rates to stimulate economic growth.

The RBI has been actively intervening in the foreign exchange market to stabilize the rupee. However, these interventions have resulted in reduced liquidity in the banking system. As a consequence, overnight interest rates have risen. The central bank’s actions are aimed at preventing further depreciation of the rupee, but they come with trade-offs that could affect overall economic stability.

Challenges for RBI’s Monetary Policy

The RBI’s monetary policy faces significant challenges due to the current liquidity conditions. A report from Standard Chartered indicates that the timeline for a potential 50 basis points repo rate cut has been pushed back to April-June from February-April. This delay is attributed to tight liquidity in the rupee market. The report also predicts a cash reserve ratio (CRR) cut in the upcoming Monetary Policy Committee (MPC) meeting, as liquidity deficits are expected to widen.

Estimates suggest that the liquidity deficit could reach between Rs 1.9 lakh crore and Rs 2.5 lakh crore by the end of FY25 if not addressed. This situation complicates the RBI’s ability to support economic growth through lower interest rates. The central bank must navigate these challenges carefully to maintain stability in the currency and the broader economy.

Future Projections and Economic Implications

Looking ahead, analysts are adjusting their forecasts for the dollar-rupee exchange rate. A report from Standard Chartered has revised its prediction, lowering the dollar-rupee forecast by 175 paise to 86.25 by March 2025. This adjustment reflects the RBI’s increasing tolerance for a stronger dollar and the impact of weaker balance of payments flows.

The RBI’s recent policy report noted that if the rupee depreciates by 5% from its baseline, inflation could rise by approximately 35 basis points. Conversely, GDP growth could see a short-term boost of around 25 basis points due to increased export stimulation. This complex interplay between currency value, inflation, and economic growth highlights the delicate balance the RBI must maintain in its monetary policy.


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