One of my Twitter follower posted this question to me: Where will USD/INR be in 2025? I responded tweeting instantly that it is good to sell 2025 US dollars (against Rupee) given the attractive interest rate differential (high forward premium for the USD/INR currency pair) and to ride the NaMo optimism which would set up significant improvement in India macroeconomic fundamentals in the years ahead, also with the belief that Modi will be in command till 2024. My opinion is also based on the confidence that Rupee depreciation can not be more than 3-4% per annum post the positive domestic developments since May 2014 (seen along with strong external tailwinds from ease in imported commodity prices); all taken, it is high probability that Rupee will be valued at premium to REER. My follower is not seen to be satisfied with this answer, hence it took me to the charts to study the past behaviour of Rupee and the circumstances which caused those movements. Here goes the analysis:
Rupee is down by 28% from 1995 to 2005 (35.15 to 45.04); down by 36% from 2005 to 2014 (45.04 to 61.36) and down by 75% during the period 1995 to now, at annualised rate of sub 3.5%. There have been abnormal fluctuations when Rupee lost by 55% during 1995 to 2002 from 31.35 to 49.07 (on weak domestic cues); recovered by 20% during 2002 to 2008 from 49.07 to 39.20 (on favourable global cues and robust $ inflows) and sharp fall by 75% during 2008 to 2013 from 39.20 to 68.85 (on series of global cues); annualised rate of Rupee depreciation was high during the period 1995-2002 and 2008-2013 beyond the interest carry advantage. The reasons for these abnormal moves either-way is attributed to hot money FII fund movements (in or out) and impact on India macroeconomic fundamentals from excessive one-way movement in commodity assets. All combined, Rupee exchange rate direction was guided by external cues and India's defence mechanism was weak given the structural woes from high CAD and low $ reserves with no ring-fence protection against FII mood-swings!
The situation now is different; there will be lot of positive developments going forward from manageable CAD, build-up of deep-pocket $ reserves, robust FDI flows diluting FII dependency and 'Make-in-India' strategy providing boost to exports. Given these positive shift of economic and market dynamics, worst case for Rupee may not be over 3% annualised depreciation rate, not ruling out best case scenario of adjusting the excessive 75% depreciation seen in 2008-2013 from 39.20 to 68.85.
Taking the best and the worst case scenario, USD/INR value by the end of 2024 may be at 65-85 and will not be surprised to see it in lower-half at 65-75, thus setting up long term "carry-trade" play for interest cost advantage. Good luck!
Moses Harding
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