In 2024, the performance of the Indian rupee (INR) against major global currencies has been influenced by a multitude of factors, ranging from global economic conditions to domestic fiscal policies. The rupee, one of the most closely watched emerging market currencies, has witnessed fluctuations driven by inflationary pressures, interest rate differentials, geopolitical tensions, and changes in trade dynamics. In this blog, we analyze the key trends in the rupee’s performance, the underlying drivers, and what the future holds for the currency in the remaining months of 2024.
Overview of the Rupee’s Performance in 2024
As we step into the last quarter of 2024, the Indian rupee has experienced volatility against the U.S. dollar, the euro, the British pound, and other key global currencies. At the beginning of the year, the rupee was trading at approximately INR 82 to the U.S. dollar, but it depreciated gradually, crossing the INR 85 mark by mid-2024. Similar depreciation was observed against the euro, with the rupee weakening from INR 90 to around INR 94 per euro. Against the British pound, the rupee has faced similar headwinds, sliding from INR 98 to INR 102.
The rupee’s weakness in 2024 can be attributed to both domestic and international factors. On the global front, inflationary pressures, especially in advanced economies, have caused central banks like the U.S. Federal Reserve and the European Central Bank to maintain a hawkish stance, leading to higher interest rates. This has triggered capital outflows from emerging markets, including India, as investors sought higher yields in developed markets. On the domestic front, challenges like inflationary pressures, fiscal deficits, and fluctuating oil prices have played a significant role in the rupee’s depreciation.
Key Drivers of the Rupee’s Performance
1. Global Interest Rate Differentials
One of the most significant factors impacting the rupee in 2024 has been the interest rate differentials between India and major economies, particularly the U.S. The Federal Reserve’s aggressive interest rate hikes to curb inflation have made the U.S. dollar more attractive to global investors, leading to a stronger dollar and weakening of emerging market currencies like the rupee. In contrast, the Reserve Bank of India (RBI) has taken a more cautious approach to rate hikes, prioritizing growth over aggressive tightening. This divergence in monetary policy has put downward pressure on the rupee.
The higher yields offered by U.S. Treasuries have triggered significant capital outflows from Indian markets, particularly from foreign portfolio investors (FPIs), further exacerbating the rupee’s depreciation. These outflows, combined with the dollar’s strength, have led to a widening trade deficit and increased pressure on the current account balance.
2. Oil Prices and Energy Imports
India is one of the world’s largest importers of crude oil, and fluctuations in global oil prices have a direct impact on the rupee’s value. In 2024, crude oil prices have remained elevated due to supply constraints and geopolitical tensions, particularly in the Middle East. As a result, India’s oil import bill has risen significantly, leading to higher demand for U.S. dollars to pay for these imports. This has contributed to the depreciation of the rupee.
The increase in oil prices has also led to inflationary pressures in India, as higher fuel prices have a cascading effect on transportation costs, consumer goods, and overall inflation. The RBI has had to balance the need for inflation control with maintaining economic growth, leading to a delicate policy trade-off.
3. Global Inflation and Economic Slowdown
Inflationary pressures in advanced economies have played a critical role in shaping the global economic environment in 2024. With inflation remaining stubbornly high in the U.S., Europe, and other major economies, central banks have continued to tighten monetary policy. This has led to slower global economic growth, impacting demand for Indian exports and putting pressure on the rupee.
The economic slowdown in China, one of India’s major trading partners, has also impacted the rupee’s performance. With China grappling with weak domestic demand and slower industrial output, India’s export sector has faced headwinds, contributing to the rupee’s weakness against the yuan and other global currencies.
4. Geopolitical Tensions and Global Risk Sentiment
Geopolitical tensions, particularly in Europe and the Middle East, have added to global uncertainty in 2024. The ongoing conflict between Russia and Ukraine, coupled with rising tensions in the Middle East, has led to volatility in global financial markets and impacted investor sentiment. This has resulted in a flight to safety, with investors flocking to safe-haven currencies like the U.S. dollar, further weakening the rupee.
Moreover, the global risk sentiment has been influenced by concerns over a potential slowdown in global trade, which could negatively impact emerging market economies like India. As a result, the rupee has come under pressure as investors seek stability in more developed markets.
Performance of the Rupee Against Major Currencies
1. Indian Rupee vs. U.S. Dollar
The U.S. dollar has been one of the strongest currencies in 2024, driven by the Federal Reserve’s aggressive monetary tightening and strong economic performance. As a result, the Indian rupee has depreciated significantly against the dollar, crossing the INR 85 mark by mid-2024.
While the RBI has intervened in the foreign exchange market to stem the rupee’s decline, the central bank’s ability to influence the currency has been limited by external factors such as global interest rates and capital flows. The rupee’s performance against the dollar is expected to remain volatile in the coming months, as the global economic outlook remains uncertain.
2. Indian Rupee vs. Euro
The euro has also strengthened against the rupee in 2024, driven by the European Central Bank’s hawkish stance on inflation and higher interest rates. The rupee has weakened from around INR 90 per euro at the beginning of the year to INR 94 by mid-2024.
The performance of the euro has been influenced by Europe’s inflationary pressures and energy crisis, with rising energy costs pushing up inflation across the continent. As a result, the euro has gained against emerging market currencies like the rupee, despite concerns about slower economic growth in the Eurozone.
3. Indian Rupee vs. British Pound
The British pound has also seen gains against the rupee in 2024, with the rupee depreciating from INR 98 to INR 102 per pound over the course of the year. The pound’s strength has been supported by the Bank of England’s monetary policy tightening to combat inflation.
However, the economic outlook for the U.K. remains uncertain, with concerns about a potential recession and the impact of Brexit on trade. As a result, the rupee’s performance against the pound could be influenced by both domestic and global factors in the coming months.
RBI’s Policy Response and Future Outlook
In response to the rupee’s depreciation, the RBI has taken a series of measures to stabilize the currency and manage inflation. The central bank has intervened in the foreign exchange market by selling U.S. dollars from its reserves to prevent excessive volatility. Additionally, the RBI has focused on maintaining price stability and supporting economic growth through its monetary policy.
Looking ahead, the performance of the rupee will depend on several factors, including global economic conditions, oil prices, and the RBI’s policy stance. If global inflation begins to ease and central banks in advanced economies slow down their rate hikes, the rupee could stabilize against major currencies. However, if inflationary pressures persist and global economic growth slows further, the rupee may face continued pressure.
Conclusion: Navigating the Challenges Ahead
The performance of the Indian rupee in 2024 reflects the complex interplay of global and domestic factors. From interest rate differentials and oil prices to geopolitical tensions and inflationary pressures, the rupee’s trajectory has been shaped by a range of challenges. While the RBI has taken steps to manage the currency’s depreciation, external factors will continue to play a significant role in determining the rupee’s performance in the months ahead.
For businesses and investors, navigating the volatility in the currency markets will require a careful assessment of global economic trends and the evolving policy landscape. With uncertainties remaining in both global and domestic markets, the rupee’s performance will be closely watched as India continues to adapt to the changing economic environment in 2024.