Indian rupee may hit 26 to the UAE dirham as RBI loosens grip
The Indian rupee could fall to less than 26 per the UAE dirham or 90 per dollar this year as the Reserve Bank of India is all set to exit its implicit quasi-peg to the dollar under the new governor.
The rupee has crashed to historic lows in recent weeks hitting 23.689 per dirham or 85.97 against the US dollar, leading to talk that the RBI is relaxing its tight control over the currency by its new Governor Sanjay Malhotra. Malhotra’s predecessor had the money tied to a slow-moving peg against the dollar.
On January 10, the rupee touched a 10-year low of 86.04 and ended at 85.9728 against the dollar, Bloomberg data showed.
Overarching foreign institutional investor (FII) outflows, dollar strength from oil importers, a higher Brent crude oil price and increasing US Treasury yields all led to the currency’s downfall.
The stronger depreciation will pose a problem to India’s export-led economy in view of higher oil prices. Yet analysts say that, over the long term, a depreciated rupee could balance trade relations and buoy the nation’s new-fangled export sector.
In other words, a weaker rupee could do favours for Indian expats sending remittances home, since they would get more rupees for their foreign earnings. It may be a temporary cushion for household incomes in India but the possibility of the rupee dropping to 95 against the dollar has huge consequences for the Indian economy.
The Gavekal Research analysts Udith Sikand and Tom Miller anticipate further increase in depreciation and the rupee could settle at 95 this year. They also think that the central bank cannot lower interest rates in a way that prevents a stronger currency crash.
Sikand and Miller had proposed in their paper that an appreciation of up to 10 per cent might be expected as the RBI moves towards a looser exchange rate policy. An unimpressive rupee might be difficult for the economy at first but, according to the analysts, it could turn out to benefit India’s export industry as a result of fixing a depreciating exchange rate.
Commentators pointed out that the RBI had since late 2022 been working on taming currency swings by policing the rupee’s exchange rate against the dollar. This brought order through a spike in foreign-exchange reserves, which climbed to an unprecedented high of $704.89 in late September 2024. But with today’s sharp rupee appreciation, reserves have plunged by around $70 billion.
It’s possible that the market would be made to move to more market-driven policy and thus the rupee exchange rate would be more volatile, monetary analysts said. This might permit some adjustment in line with the economy, but it can leave companies and investors in the dark.
To leave the rupee to fall further will have mixed consequences for inflation and growth. At one level, a lower rupee could put exports on a level playing field and that could encourage growth. Conversely, it may increase inflationary pressures, especially for imports, they added.
Foreign exchange reserves held by the RBI have served as a necessary hedge against the changing rates. But if reserves shrink due to intervention or capital flows, the RBI might be limited in holding back the rupee from destabilisation by market pressures, currency specialists said.
The lower rupee would hike import prices – especially crude oil – which could raise inflation. This would make it difficult for the RBI to manage growth and inflation, said experts.
If the rupee does fall, it can make Indian products more competitive in international markets and boost exports. But those gains might be diluted by an increase in input costs, particularly for the sectors that depend on imported materials.
But, if currency appreciation does have an effect on investor sentiment, equity and debt markets will become more volatile. It would discourage foreign direct investment and impact the general economic wellbeing.
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