However, massive strength in dollar index has significantly contributed to the sharp decline in rupee although the currency managed to keep afloat till recent times even as dollar accrued gains since the start of the year. The dollar index futures have registered over 3% gains so far this year ranging from 101 to near 105 mark in April whereas rupee has fallen just 0.3% during the period with losses accumulated lately.

RBI noted that during the first three quarters of 2023-24, India’s current account deficit (CAD) narrowed significantly on account of a moderation in merchandise trade deficit coupled with robust growth in services exports and strong remittances.39 India’s merchandise and services exports have grown at a healthy pace in Q4:2023-24.40 India continues to be the largest recipient of remittances in the world. The cost of receiving remittances is gradually coming down.41 Overall, the CAD for 2024-25 is expected to remain at a level that is both viable and eminently manageable.

India’s foreign portfolio investment (FPI) flows also saw a significant turnaround in 2023-24, RBI noted. Net FPI inflows stood at US$ 41.6 billion during 2023-24, as against net outflows in the preceding two years (US$ 14.1 billion in 2021-22 and US$ 4.8 billion in 2022-23). This is the second highest level of FPI inflow after 2014-15.42 Net foreign direct investment (FDI) moderated to US$ 14.2 billion in April-January 2023-24 from US$ 25.0 billion a year ago. External commercial borrowings (ECBs) and non-resident deposits recorded higher net inflows compared to the previous year. The amount of ECB agreements also grew markedly during 2023-24 (up to February 2024).45 India’s foreign exchange reserves reached an all-time high of US$ 645.6 billion as of March 29, 2024. Latest data on various external vulnerability indicators suggest improved resilience of India’s external sector.

The country’s foreign exchange reserves increased $2.951 billion to $645.583 billion for the week ended March 29, according to the latest RBI report. This is the sixth consecutive week of a jump in overall reserves. For the week ended March 29, the foreign currency assets, a major component of the reserves, increased $2.354 billion to $570.618 billion. Gold reserves increased $673 million to $52.16 billion during the week, the RBI said. The Special Drawing Rights (SDRs) were down $73 million to $18.145 billion. India’s reserve position with the IMF was also down $2 million to $4.66 billion in the reporting week, the apex bank data showed. Foreign direct investment recorded a net inflow of $4.2 billion compared with a net inflow of $2 billion in Q3 of 2022-23. Foreign portfolio investment recorded a net inflow of $12 billion in 3QFY24, higher than $4.6 billion a year ago. External commercial borrowings saw a net outflow of $2.6 billion in the third quarter of this fiscal compared with a net outflow of $2.5 billion a year ago.

Meanwhile, the National Stock Exchange (NSE) and BSE issued circulars to brokerages on April 1 to ensure that their clients trading in currency derivatives are in line with the Reserve Bank of India~s directives, which will come into effect from April 5. According to the central bank notification dated Jan 05, 2024, RBI would allow exchanges to offer forex derivative contracts involving the INR only for contracted exposure or hedging, compared to the current allowance of up to $100 million without any explicit underlying exposure. For exchange traded foreign exchange derivative contracts involving INR, recognized stock exchange shall ensure that the user is allowed to take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all Recognized Stock Exchanges.

INR VS Majors

USDINR registered a dip of 0.3% so far this year as against over 2% slide in most emerging market currencies. The Indian rupee (INR) has remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24, RBII Governor stated. The INR was the most stable among major currencies during this period. As compared to the previous three years, the INR exhibited the lowest volatility in 2023-24. The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position, he noted. The depreciation of Indian rupee (INR) at 1.4 per cent against the US dollar in 2023-24 was lower as compared to emerging market peers like Chinese yuan, Thailand baht, Indonesian rupiah, Vietnamese dong and Malaysian ringgit and a few advanced economy currencies like Japanese yen, Korean won and New Zealand dollar. During 2022-23 and 2023-24, the INR was one of the least volatile in terms of CV among various peer EME currencies including the Chinese yuan, the Thailand baht, Malaysian ringgit and Brazilian real.

Outlook:

The Indian rupee fell in March after registering a considerable appreciation in February. INR fell to a low of 83.37 amid growing strength in dollar overseas, although the local unit was relatively steady compared to other emerging market currencies. US Fed officials staying skeptical about a near term rate cut as against earlier expectation is seen keeping benchmark 10 year treasury yields and dollar supported. Numerous Fed officials speaking in recent times were consistent in their messages that it~s appropriate to wait until there~s a clearer indication that inflation is slowing toward their target before taking the first step toward reducing borrowing costs. Another factor that is going to affect the Indian currency is the general elections scheduled this year. Positive outcome from election could attract flows and potentially bolster the rupee.