In CY25, the Indian Rupee (INR) is expected to experience marginal depreciation, largely driven by continued volatility in Foreign Portfolio Investor (FPI) flows and the likelihood of a stronger U.S. dollar, according to a Bank of Baroda report.
The Indian Rupee (INR/RS) depreciated by 2.8 per cent in CY24 but still outperformed many of its peers. The Reserve Bank of India (RBI) has actively intervened in the forex market to manage currency fluctuations.
India’s foreign exchange reserves stood at USD 644.3 billion as of December 20, 2024, reflecting stable current account dynamics and lower oil prices, which helped support the rupee.
Equity markets have witnessed a slight correction in recent days, but analysts are optimistic about the indices’ performance in early 2025, buoyed by expectations of a recovery in earnings.
This recovery is anticipated to be fuelled by a boost in rural spending and an uptick in government expenditures, which could provide strong tailwinds for the markets.
Both the Sensex and Nifty 50 have performed remarkably well in CY24, surging by 8.7 per cent and 9 per cent respectively.
Notably, the Sensex reached an all-time high this year, crossing the 85,500 mark, a milestone that underscores investor confidence. The real estate, consumer durables, and IT sectors have been the best performers, driving significant returns for investors.
On the global stage, equity indices also closed CY24 on a high note, with a broad rally across major markets. In the United States, the S&P 500 and Dow Jones posted double-digit annual gains.
However, some uncertainty remains as investors await the policy direction under President-elect Trump, which could introduce new risks.
The bond market outlook for CY25 is clouded with uncertainty, particularly due to potential inflationary pressures stemming from the policies of the incoming Trump administration.
US treasury yields ended CY24 with a modest increase of 69 basis points, climbing above the 4.5 per cent mark. Mixed economic signals caused yields to move sideways throughout the year, though they remain elevated, signalling that inflation risks persist.
The Federal Reserve initiated a monetary easing cycle in September 2024, cutting rates for the first time in three years.
However, the Fed has dialled back on further rate cuts for CY25, with only two additional reductions expected, bringing the federal funds rate down to a range of 3.75 per cent-4 per cent. This cautious approach underscores the ongoing concerns about inflation and economic stability.
The Indian government is maintaining fiscal prudence, targeting a fiscal deficit of 4.9 per cent of GDP and a gross borrowing target of Rs 14 trillion for FY25. The RBI is expected to go for a rate cut possibly in Feb’25 policy meeting after keeping rates on hold at 6.5 per cent since Feb’23. (ANI)
