Indian Rupee to Fly Free?

 

Even if market experts expect substantial capital inflows into the Indian market in 2024, the national currency, Indian Rupee (INR), is not likely to emerge stronger as the Reserve Bank of India (RBI), the country’s central bank, will continue to control the currency.

India expects to see billions of inflows into equity and debt inflows this year. The country also hopes for higher foreign direct and portfolio investment and offshore borrowings.

The expectation is not without any rationale.

Only in September 2023, JPMorgan included India in its widely tracked emerging market debt index.

• It included India's local bonds in the Government Bond Index-Emerging Markets (GBI-EM) index.

• 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion were included.

• Earlier, the Indian government restricted foreign investments on some government securities.

• Inclusion will begin on June 28th, 2024, and extend over the next 10 months.

However, the global venture into the Indian market is not going to make the INR any stronger as the currency is still tightly controlled by the RBI.

The primary goals of the RBI vis-à-vis the INR is containing its volatility in relation to other national currencies. The concern is not without merit if we look at the USD/INR exchange rate over the last year.

 

Source: USD/INR FX Spot Rate, CNBC

Throughout 2023, 1 USD was worth more than 80 INR, not letting the central bank ease its grip. The RBI is counted among the most active central banks as it aims to rein in rupee volatility.

The narrow range within which the USD/INR pair floated the last year was the result of the RBI’s consistent actions.

The International Monetary Fund (IMF) criticised the RBI for “excessive interventions” to stabilise the INR’s value. In response, the RBI called the Fund’s assessment “unjustified.”

Note that the INR dipped more than 11% in 2022, its worst performance since 2013. In comparison, the currency proved to be very resilient in 2023.

Further, the bank also aims to focus on building forex reserves which fell to a two-year low in 2022. (India's forex reserves hit an all-time high (ATH) of $645 billion in October 2021.) The effort led to India’s reserves rising back to $617 billion as per the latest data.

So far, the first few days of 2024 have seen 38 global IPO listings out of which 11 debuted in India itself. Asia-Pacific led the charge, with 34 listings in the region.

 

Source: Bloomberg

In terms of nominal GDP, India is leading the way as the world’s fifth-largest economy. The Indian economy is worth $3.73 trillion as of now, and the country dreams of becoming a $5 trillion economy by 2028.

A stable national currency forms the backbone of an economy.

The RBI is not willing to abandon the ship as long as Rupee is concerned.

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