RBI Aims to Maintain Rupee within Narrow Trading Range: Reuters Poll

By Veronica Dudei Maia Khongwir

BENGALURU – According to a recent Reuters poll of foreign exchange analysts, the Indian rupee is expected to remain within a narrow trading range against the U.S. dollar in the coming year. This anticipated stability is largely due to the Reserve Bank of India’s ongoing interventions aimed at mitigating currency volatility.

In August, the dollar experienced a decline of over 2% against other major currencies, providing some relief for emerging markets. Although the rupee reached a record low of 83.97 to the dollar, it has only depreciated by about 1% this year.

This relative steadiness can be attributed to the RBI’s consistent involvement in the foreign exchange market. The central bank’s foreign exchange reserves reached a record high of $681.69 billion at the end of last month, indicating that it has been purchasing dollars amid speculation regarding potential rate cuts by the U.S. Federal Reserve.

The rupee is predicted to strengthen slightly from its current rate of 83.96 to the dollar, reaching 83.75 by the end of November and 83.60 in the next six months, remaining stable at that level for a year, according to the poll conducted from August 2-4 with 45 foreign exchange analysts.

Dhiraj Nim, an economist at ANZ, commented on the situation: "Even though the dollar has eased, the rupee has refused to strengthen in line. This pattern was expected, as the Reserve Bank of India remains actively engaged in the market." He noted that the RBI has effectively implemented a dual strategy of buying and selling foreign currency to maintain the rupee’s value within this narrow range, particularly testing the critical level of 84.

Analysts have suggested that the RBI’s interventions are designed to bring the partially convertible currency closer to its fair value, which they believe is currently overvalued by at least 7%. Data from the central bank’s monthly bulletin indicated that the rupee’s trade-weighted real effective exchange rate stood at 107.33 in July, making it the most expensive relative to its trading peers since December 2017.

Suman Chowdhury, chief economist at Acuite Ratings, stated, "I believe this overvaluation of the rupee will be addressed, as it’s essential for ensuring the competitiveness of exports. The real effective exchange rate is a key focus for the RBI."

Significantly, over 40% of respondents (14 out of 35) with a longer-term perspective expressed expectations that the rupee might reach a record low.

Overall, the outlook for the Indian rupee reflects a complex interplay of market forces and central bank strategies aimed at maintaining currency stability while addressing valuation concerns.