DBS Bank sees rupee weakening to 93-94, flags need for inflow measures

The Indian rupee is likely to gradually weaken to 93-94 to the US dollar this year as capital inflows dwindle, highlighting the need for ‍major measures to attract foreign funding, a ​senior official at DBS Bank India said.

The currency slipped to a record low of 91.9850 on Thursday. A fall to 93 would mark a 1 per cent additional decline, while 94 would imply a roughly 2 per cent drop.

"Rupee is likely to witness well-anchored depreciation towards 93-94," said Ashishh Vaidya, managing director & treasurer - global financial markets.

"The RBI would be comfortable with year-on-year depreciation of 3-4 per cent to reflect the impact of the ​trade deficit and the inflation differential, especially in the absence of capital flows."

Capital outflows pressured the rupee through 2025 and continue to shape its outlook. The currency is already down 2.3 per cent this month, adding to a near 5 per cent decline last year.

Foreign investors have withdrawn roughly $4 billion from local equities in January, with bankers noting that external commercial borrowing and net foreign direct investment inflows also remain subdued.

As a result, bankers say attention is increasingly turning to other measures to support inflows.

"The Reserve Bank of India will need to consider structural measures like an FCNR discount window to incentivise medium-term inflows, to substitute for the lack of capital inflows," Vaidya said.

Reintroducing a Foreign Currency Non-Resident window would allow banks to raise foreign currency deposits from non-resident Indians.

The RBI last used this measure in 2013 during the "taper tantrum", when the rupee plunged as foreign investors withdrew capital after the Federal Reserve hinted it could reduce quantitative ‌easing.

The FCNR scheme helped bring in $25-$30 billion of ​inflows and alleviate pressure on the currency at the time.

A trade limbo with the United States has compounded challenges to capital inflows, reinforcing foreign investor caution.

The rupee has weakened nearly 5 per cent since August, when the US imposed tariffs on Indian exports.

"A US-India trade deal could assist in rooting out the negativity ‍priced into rupee, though over the medium term, we would need growth capital to return to provide stability to the rupee," Vaidya said.

Vaidya reckons that debt investments are also unlikely to ‍revive ‌in the current ​environment where global yields are inching higher and the rupee is ‍under pressure.

He expects conditions to improve only in the second half of the year, when US rate ‍cuts, ‍combined with relatively higher ‌domestic yields and a more stable currency, could restore the appeal of carry trades.