In a surprising turn of events, the Indian rupee opened the day stronger against the US dollar, gaining 75 paise to reach 84.65. This marks a significant improvement from its previous close of 85.38. The trading experts predict that the rupee will likely move within a range of 84.50 to 85.25 throughout the day.
This positive momentum for the rupee follows a major trade agreement between the United States and China. The deal includes the US reducing tariffs on Chinese goods from a hefty 145% to just 30% for a period of 90 days. In response, China will also decrease tariffs on US products from 125% to 10%. The two nations have also agreed to set up a mechanism for ongoing discussions about their economic and trade relations.
Analysts suggest that any new developments in the geopolitical landscape could heavily influence the rupee’s performance in the upcoming days.
A Year of Challenges and Recovery
The Indian rupee has faced a rollercoaster ride over the past financial year (FY25), trading between 83.10 and 87.6 against the dollar. Initially, the rupee weakened after the US elections, experiencing a decline of 2.4% primarily due to foreign portfolio investors (FPI) pulling money out of India and a strengthening US dollar.
Nevertheless, despite these challenges, the rupee has shown remarkable stability compared to many other global currencies. This resilience can be attributed to several factors, including sound government finances, a decreasing current account deficit, improved liquidity, and falling oil prices.
Towards the end of the year, we saw a turnaround. A dip in the dollar’s strength and a renewed influx of foreign investments allowed the rupee to bounce back, appreciating by 2.4% just in March.
What Lies Ahead for the Rupee?
According to the NSE’s ‘Market Pulse Report’ for April, the rupee’s average annualized volatility has decreased to just 2.7%. This places it among the least volatile currencies in major emerging markets. The report highlights India’s robust external buffers and effective foreign exchange management as key factors in this stability.
However, the report also notes that the rupee remains slightly overvalued, with the 40-currency trade-weighted Real Effective Exchange Rate (REER) rising to 105.3. While both the REER and the Nominal Effective Exchange Rate (NEER) have gradually moderated since the first half of FY25, this indicates a slight easing of overvaluation in the rupee.
As the Indian economy continues to navigate these complex waters, the outlook remains cautiously optimistic. Investors and analysts alike will be keeping a close eye on further developments that could shape the future of the rupee.
