The Indian Rupee has reached a new low again, with Mitsubishi UFJ warning that under threefold pressure, the Indian Rupee will fall below the 88 mark by the end of the year.

On January 6th, the Indian Rupee faced fresh selling pressure, dropping to below 86 against the US dollar during the day, reaching a low of 86.006, a new historical low, and as of the time of reporting, it was at 85.696. Over the past year, the Rupee has set a series of new lows, with depreciation speeding up in December, rising from 84.50 to 85.72.

In terms of news, according to media reports, former Deputy Governor of the Reserve Bank of India (RBI) Viral Acharya stated in an interview that the Indian central bank should relax its strict control over the Rupee's exchange rate. This viewpoint has sparked market speculation about whether the newly appointed central bank governor will continue the predecessor's policy of limiting currency fluctuations.

Prior to this viewpoint being expressed, Mitsubishi UFJ downgraded its Rupee outlook in a report last Thursday, predicting that the US dollar to Rupee exchange rate will rise to 86.80 in the first quarter of 2025 and to 88.50 in the fourth quarter, based primarily on continued deficit pressure on the balance of payments in the first half of 2025, disappointing foreign capital inflows, and external factors such as the risk of Trump 2.0 tariffs.

Former central bank officials hint at 'relaxing forex controls.'

Acharya believes that "the central bank does not need to completely eliminate fluctuations to manage excessive volatility." He emphasized that allowing a certain degree of fundamental fluctuations is important as it can maintain a certain level of private hedging, and the central bank cannot absorb all risks completely.

As this viewpoint emerged, the market is waiting to see whether the new central bank governor Sanjay Malhotra will continue the previous proactive intervention policy in the forex market. Despite the Rupee reaching historical lows multiple times last year, it remains the most stable currency among Asia's Emerging Markets and has become a popular high-yield arbitrage currency. It is worth noting that in recent weeks, the Rupee's volatility has increased, primarily due to the strengthening dollar and the widening trade deficit pressure.

Acharya served as deputy governor from January 2017 to July 2019, during Trump's first term in office. He recalled that during the period of interest rate hikes in the USA, the Reserve Bank of India decided "not to excessively defend the rupee exchange rate at all costs."

We realized that a certain degree of depreciation must be allowed to partially absorb macroeconomic pressure, essentially giving the economy some buffer.

In addition, India's Forex reserves fell from a record high of 705 billion USD set last September to 640.3 billion USD on December 27, a new low in eight months. In this regard, Acharya warned: "No matter how large your reserve stock is, if a significant portion is lost in a short time, it will not send a good signal to the market."

Under triple pressure, the rupee is expected to continue to fall until 2025.

Mitsubishi UFJ Analysis and Forecasts show that India's balance of payments may continue to show a deficit in the first half of 2025, mainly driven by the following factors:

1. First, the current account deficit as a percentage of GDP has been adjusted from the previous forecast of 1.2% to 1.5% (fiscal year 2024/25) and 1.4% (fiscal year 2025/26). This is mainly due to the growth in Gold imports being much stronger than expected; although service exports have improved, the Commodity trade deficit remains a major drag.

2. Second, foreign direct investment (FDI) performance has been disappointing. Although India's total FDI inflow has slightly improved, foreign capital withdrawal and increased overseas investments by Indian companies have led to a net direct investment outflow. 2025 may see some improvement, but it remains a pressure point in the short term.

3. Global factors do not fully support; there is a tariff risk of Trump 2.0, coupled with a more hawkish Federal Reserve. Local factors also indicate that the trade-off between growth and inflation is not as optimistic for India. Although India may be included in the Bloomberg Global Aggregate Bond Index in the second half of 2025, which is expected to bring in an additional 10-15 billion USD in inflow, global risks and the stickiness of USA interest rates remain potential resistances.

Moreover, Mitsubishi UFJ believes that although the Forex policy of the Reserve Bank of India may become less interventionist and allow the Indian Rupee to depreciate appropriately, it is unlikely to completely let the Indian Rupee go. Policies such as increasing the Gold import tax, providing Forex swap windows for oil companies, and export conversion rules will help manage the weakness of the Indian Rupee. Mitsubishi UFJ continues to forecast a 75 basis points rate cut by the Reserve Bank of India but has postponed the timing of the cut to accommodate the weakening outlook for the Indian Rupee.