As 2024 comes to a close, the Indian Rupee has certainly faced numerous challenges

This year, the currency depreciated by approximately 3%. The underlying reasons are multifaceted, but concerns surrounding a sluggish global economic growth and the robust resurgence of the US Dollar are undoubtedly critical factors at play.

The weakness in global economic growth has dampened market sentiment, leading investors to adopt a lower risk appetite and seek haven assetsThe dollar, as the primary reserve and safety currency globally, has naturally gained favorIts strong recovery has exerted enormous pressure on emerging market currencies, including the Indian RupeeIn this challenging environment, the Rupee has struggled; however, compared to other emerging market currencies, its performance has been relatively resilient, with less volatility

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This behavior has somewhat alleviated market tension and provided a degree of support for India's economic stability.

Shaktikanta Das, the former governor of the Reserve Bank of India, highlighted that the Rupee’s diminished volatility can be attributed partly to effective management by the central bankThe Reserve Bank of India (RBI) has made significant efforts to stabilize the Rupee's exchange rate against the dollarGiven India's heavy reliance on oil imports and the continual widening of the trade deficit, the Rupee has been under persistent depreciation pressureTo stabilize the exchange rate, the RBI has actively participated in the non-deliverable forward foreign exchange market, which effectively curbs abrupt declines in the Rupee

Additionally, the RBI has adopted various other measures, such as adjusting interest rate policies and bolstering oversight of the forex market, to maintain the currency's stabilityHowever, despite these proactive moves, the Rupee experienced pronounced fluctuations in 2024, a clear example being the drop in foreign exchange reserves from a historical peak of $704.89 billion in September to a near six-month low of $644.39 billion in December, reflecting the immense pressure faced by the central bank in stabilizing the exchange rateSimultaneously, the Rupee underwent significant depreciation against the dollar, falling from 83.19 at the year's start to 85.59 by the year's end, impacting India's international trade, corporate profits, and inflation rates.

Nonetheless, the Rupee has not performed poorly across all metrics

For instance, amidst recent exchange rate fluctuations, the Rupee has shown a notable appreciation against the Yen and the EuroAnalysts have attributed this trend primarily to significant improvements in the United States' macroeconomic factors, prompting a robust dollar performance, which in turn led the Federal Reserve to slow down its previously accommodating monetary policyIn this macroeconomic scenario, other major currencies such as the Yen and Euro have depreciated to varying extents against the dollar, while the Indian Rupee has managed to advantageously respond, reflecting resilience against these counterpartsFurthermore, the considerable outflow of foreign institutional investors also had a substantial impact on the RupeeFrom October to December, the Indian stock market witnessed a massive outflow from foreign institutional investors, amounting to around ₹1.7 trillionThis significant capital withdrawal rapidly diminished the supply within the domestic financial market, disrupting the existing funding equilibrium and thereby placing additional pressure on the Rupee's exchange rate.

Looking ahead, while the Indian Rupee is expected to face several challenges, the outlook appears relatively stable

Ajit Mishra, Senior Vice President of Research at Religare Broking Ltd, anticipates that the Rupee-to-dollar exchange rate will fluctuate between 82 and 87. This forecast indicates that despite current uncertainties—including ambiguous global economic growth prospects, alterations in US monetary policy, and geopolitical tensions—the Indian currency may still find a new equilibrium moving forwardThe fundamental aspects of the Indian economy remain relatively robust; the domestic market holds immense potentialAs the Indian government continues to implement economic reforms and structural adjustments, coupled with combined efforts from the central bank on monetary policy and exchange rate management, the Indian Rupee is positioned to maintain a degree of stability in the futureMoreover, the recovery of the global economy and enhancements in international trade conditions will provide further external support for the stability of the Rupee