A significant forecast from SBI Funds Management predicts a challenging period ahead for the Indian rupee. The currency is expected to depreciate by about 5% against the US dollar in the calendar year 2025. Looking further ahead, the rupee could then ease to a level around 92 against the greenback in 2026.
Detailed Analysis and Projected Timeline
The report, titled 'The Rate Cut Cycle: A Cross-Country Analysis' and authored by the research team at SBI Funds Management, provides a detailed roadmap for the rupee's movement. The projected 5% decline in 2025 would follow an estimated 1.5% depreciation in the current calendar year, 2024. This sets the stage for the currency to potentially reach the 92 rupees per US dollar mark in 2026.
The analysis hinges on a major global financial shift: the anticipated start of a rate-cutting cycle by the US Federal Reserve. The report suggests this cycle could commence from September 2024. Historically, such a shift has profound implications for emerging market currencies like the Indian rupee.
Key Drivers Behind the Rupee's Projected Path
Several interconnected factors are expected to drive this currency movement. The primary catalyst is the divergence in monetary policy between India and the United States. While the Fed is expected to begin cutting rates, the Reserve Bank of India (RBI) is likely to maintain a relatively hawkish stance to control domestic inflation. This policy gap typically influences currency valuations.
Furthermore, the report highlights that a stronger US dollar in the first half of 2024 has already created pressure. The expected Fed rate cuts later in the year are seen as a trigger that will reverse some of this dollar strength, thereby allowing the rupee to find some footing before its projected slide in 2025.
Another critical element is India's robust economic growth. The report notes that India's strong GDP expansion, projected to be around 7%, acts as a double-edged sword. It attracts foreign investment but also increases the demand for imports, widening the trade deficit and putting downward pressure on the rupee.
Implications and Broader Economic Context
The forecasted depreciation carries significant implications. A weaker rupee makes imports more expensive, which can contribute to inflationary pressures within the Indian economy. This is a key concern that the RBI will have to manage carefully. However, it also makes Indian exports more competitive in the global market, potentially giving a boost to the manufacturing and export sectors.
The SBI Funds report places India's situation in a global context, comparing it with other emerging economies. It suggests that while the rupee will face headwinds, the underlying strength of the Indian economy provides a fundamental cushion against extreme volatility. The projected movement to 92 by 2026 is framed as a gradual adjustment rather than a sharp, disruptive fall.
In summary, investors and policymakers should prepare for a period of rupee weakness starting next year, driven by global monetary policy realignment and domestic growth dynamics. The path to 92 against the dollar by 2026 appears to be a central scenario based on current economic indicators and expected shifts in central bank policies in the US and India.
