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March 30, 2024

Rupee Emerges as Asia’s Most Stable Currency in FY24, Defying Regional Volatility

In the tumultuous landscape of Asian currencies during the fiscal year FY24, the Indian Rupee stood out as a beacon of stability, closely trailing behind the currencies of Singapore and Hong Kong. This remarkable feat was primarily attributed to the surge in foreign portfolio investments, amounting to a staggering Rs 3.23 trillion, which bolstered both the rupee and the bond market, shielding them from global uncertainties. Compared to the preceding fiscal year, which witnessed an outflow of Rs 45,365 crore, this turnaround marked a significant milestone for the Indian economy.

Throughout the financial year FY24, domestic economic conditions remained favorable, with headline inflation largely staying within the Reserve Bank of India’s (RBI) comfort zone of 2-6 percent. Notably, between April 2023 and February 2024, CPI inflation breached the 6 percent mark only twice. This stability in inflationary pressures provided the Monetary Policy Committee (MPC) with the leeway to keep the repo rate unchanged at 6.50 percent, ensuring monetary continuity and confidence in the market.

The bond market, a key indicator of economic health, experienced a notable shift, with the benchmark government bond yield decreasing by 26 basis points over the fiscal year. This decline was propelled by an influx of early-stage capital inflows within the debt segment from Foreign Portfolio Investors (FPIs), anticipating the inclusion of Indian bonds in the J P Morgan index, scheduled to commence in June 2024.

Despite global headwinds, the rupee demonstrated resilience for the majority of the financial year, witnessing only marginal depreciation of 1.5 percent compared to the significant 7.8 percent depreciation in FY23. However, towards the end of the fiscal year, the rupee encountered volatility, culminating in a record closing low of Rs 83.43 against the US dollar on March 22. This downturn was attributed to weakening Asian peers and heightened demand for dollars from local importers.

V R C Reddy, the head of treasury at Karur Vysya Bank, remarked, “The rupee exhibited remarkable stability throughout the year compared to other emerging market currencies. Volatility only surfaced towards the end of the financial year, driven by yuan depreciation and dollar strengthening.”

The third quarter of FY24 posed significant challenges for both the rupee and the bond market. The depreciation of the Chinese yuan in August exerted pressure on the rupee, stemming from a reduction in the interest rate differential between the yuan and the dollar. Additionally, the bond market experienced fluctuations, characterized by optimism for rate cuts in the first quarter, followed by a surge in yields triggered by the OMO incident.

Looking ahead, despite the mixed performance witnessed during FY24, industry experts remain cautiously optimistic about the trajectory of the Indian economy. The implementation of the Incremental Cash Reserve Ratio (ICRR) by the RBI in August temporarily impacted banking system liquidity and caused short-term bond yields to surge. However, this measure is viewed as a prudent step towards maintaining financial stability and managing inflationary pressures.

In conclusion, the resilience showcased by the Indian Rupee amidst regional volatility underscores the strength of India’s economic fundamentals and its ability to navigate through challenging global landscapes. As the fiscal year FY24 draws to a close, the stage is set for continued growth and stability in the Indian financial markets.

Jhumpa Lahiri

Jhumpa Lahiri

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