As we enter 2024, the global financial landscape is rife with intrigue and potential upheaval, largely owing to significant elections in the UK, India, and the US, which are amplifying uncertainty in market sentiment. These elections loom large and are undoubtedly contributing to an increased level of market volatility.
One of the focal points in the coming year revolves around the competition among central banks as they grapple with interest rate adjustments to stimulate economic activity. The concerted effort to lower rates is aimed at fostering economic growth, but it has also raised concerns about possible currency devaluation. Investors, including myself, are closely monitoring central bank decisions, as these have a significant impact on major currencies, including the Indian Rupee (INR) and European market currencies.
Geopolitical tensions, always influential in shaping market dynamics, are expected to play a pivotal role in 2024. The potential impact on crude oil prices could have ripple effects on equity markets and emerging market currencies.
On the domestic front, Bhansali anticipates strength in the Indian Rupee, with a bullish outlook pushing it towards levels around Rs 82/$1 and Rs 81.80/$1. However, caution is warranted, as Rs 83.50/$1 is expected to act as a formidable resistance level. Short-term projections for the INR/USD pair indicate a trading range of Rs 82.85/$1 on the lower side to Rs 83.25/$1 on the higher side. Exporters like me are encouraged to capitalize on levels above Rs 83/$1 by aggressively increasing our hedge ratio, while importers are advised to exercise prudence and consider hedging strategies near the Rs 83 mark, adapting to evolving market conditions.
In recent months, the Rupee has maintained a narrow range of Rs 83 to 83.40/$1, which can be attributed to RBI interventions, inflows from Foreign Portfolio Investors (FPIs), and a strategic balance in the buying and selling of dollars by the RBI, causing a global shortage of dollars.
The upcoming Lok Sabha Election introduces an additional layer of uncertainty, with FDI falling to $33 billion by September 2023 from $71 billion in the previous year. Clarity on the government’s return is eagerly awaited, as it is expected to influence investor confidence.
In a research note, Standard Chartered Bank stated, “We expect the INR to be range-bound over a 12-month time horizon.” Key supporting factors include attractive real yields, an improving balance of payments outlook supported by India’s inclusion in the global bond index, softer commodity prices, strong RBI FX reserves, and a mildly bearish USD outlook. However, the bank acknowledges potential pressures on the INR due to slowing FDI flows, weak manufacturing export growth amid slowing global growth, and a narrowing policy rate differential with the US.
Global economic factors are also in play, with the Federal Reserve signaling potential rate cuts in 2024. This shift from controlling inflation to stimulating growth is expected to soften the US Dollar Index, creating a favorable environment for the Indian Rupee. Falling oil prices contribute to a substantial reduction in the current account deficit, potentially achieving a positive balance of payments.
The bank further anticipates a range-bound USD over the next 3 months, with USD/JPY potentially having further to fall and USD/CHF appearing oversold. Looking ahead on a 6-12-month horizon, Standard Chartered Bank expects the USD to move modestly lower, citing the Fed’s increasingly dovish tone and the likelihood of more range-bound interest rate differentials as global inflation slows. However, the rising risks of a hard landing scenario later in 2024 pose downside risks to US yield differentials and the USD.
Even though a modest depreciation of the Rupee is expected, a significant decline seems improbable given the central bank’s intervention. A senior research analyst at a foreign bank believes that “the Rupee will trade slightly favorably due to growing expectations of a US Federal Reserve interest rate reduction.”
Projections from market experts anticipate the Rupee climbing to Rs 78/$1 against the dollar by the end of 2024, while DBS predicts a potential appreciation to Rs 82/$1. However, external factors such as geopolitical tensions and rising oil prices will continue to sway the currency’s trajectory, making it an exciting yet challenging year for investors like myself.