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Despite significant foreign portfolio investor (FPI) outflows in February, the rupee managed to avoid sharp depreciation, because of a stable US dollar and the Reserve Bank of India's (RBI) active intervention, according to a report by Bank of Baroda.
The report highlighted that the rupee weakened by one per cent in February 2025, following a 1.2 per cent decline in January. It said "Despite the extent of FPI outflows, a benign dollar and RBI's deft intervention has kept a lid on INR's slide" The depreciation of the Indian rupee is primarily driven by external factors, particularly the US Federal Reserve's policy stance and concerns over higher tariffs on Indian exports by the new US administration. These factors have contributed to negative investor sentiment, leading to capital outflows from the Indian market. The report also added that so far in 2025, FPIs have withdrawn nearly USD 12 billion, with the majority of outflows concentrated in the equity market. However, there has been some support from the Fully Accessible Route (FAR) segment, which allows foreign investors to invest in government bonds without restrictions. It said, "In fact, foreign investors have pulled out close to USD 12 billion in 2025. Most of this has been concentrated in the equity market". Looking ahead, the report predicts that the rupee will trade within a range of 86.75-87.75 per US dollar in the near term. However, the report also warned that there are upside risks, meaning the rupee could weaken further if global conditions worsen. Despite some positive developments, including stronger economic growth in Q3 and optimistic projections for Q4, the report suggested that these factors may only provide temporary relief. The key to a sustainable recovery of the rupee lies in improving global risk sentiment and stabilizing FPI flows. To strengthen its ability to manage currency fluctuations, the RBI recently conducted a USD/INR swap, adding USD 10 billion to its forex reserves. This move is expected to provide the central bank with additional resources to intervene in the market if trade tensions escalate further. While the rupee remains under pressure, RBI's measures and global economic trends will play a crucial role in determining its future trajectory. (ANI)
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