Fitch Forecast SHOCKS: Indian Rupee Set for Strong Comeback by 2026! Investor Alert!

Fitch Predicts Rupee Rebound

Fitch Ratings has forecasted a notable strengthening of the Indian Rupee, projecting it to reach 87 against the US dollar by the close of 2026. This projection marks a potential reversal from the currency's recent descent, which saw it hit a record low above 90.29.

Strong Economic Fundamentals

• The positive outlook is underpinned by Fitch's upgraded economic growth forecast for India in FY26 to 7.4 percent, up from 6.9 percent. This revision reflects robust private consumption, aided by tax reforms.
• India's GDP already demonstrated strong momentum with an 8.2 percent expansion in the second quarter, the highest in six quarters.
• Inflation is expected to remain subdued, forecast at 1.5 percent this fiscal year before rising to 4.4 percent next year.

Undervaluation and Competitiveness

• Data from the Reserve Bank of India suggests the rupee is currently undervalued. The 40-currency Real Effective Exchange Rate (REER) stood at 97.47 in October, indicating the longest undervaluation period in eight years.
• Low domestic inflation has contributed significantly to this REER reading.
• Economists note that a REER between 102-103 typically signifies a fairly valued currency, implying the current undervaluation may support export competitiveness.

Reserve Bank of India Policy Outlook

• Fitch believes that with inflation declining sharply, the Reserve Bank of India might have scope for an additional rate cut in December, potentially lowering the repo rate to 5.25 percent.
• The agency anticipates further rate cuts totaling 100 basis points in 2025, alongside a reduction in the cash reserve ratio from 4 percent to 3 percent.
• However, Fitch expects the RBI to maintain steady interest rates for the subsequent two years as core inflation firms up and economic growth remains solid.
• The recent depreciation of the rupee has complicated the RBI's monetary policy decisions, with the Monetary Policy Committee likely to consider interest rate differentials with the US Federal Reserve.

Impact

• A strengthening rupee can lower import costs for businesses and consumers, potentially reducing inflation for imported goods and making foreign travel cheaper.
• It may, however, make Indian exports more expensive, impacting the competitiveness of export-oriented sectors.
• Foreign investors might find Indian assets more attractive due to currency appreciation potential.
• Impact Rating: 8/10

Difficult Terms Explained

• Real Effective Exchange Rate (REER): A measure comparing a country's currency value against a basket of other major currencies, adjusted for inflation. A REER below 100 generally indicates undervaluation.
• Repo Rate: The interest rate at which the Reserve Bank of India lends money to commercial banks, used as a key tool to manage inflation and liquidity.
• Basis Points: A unit of measure equal to one-hundredth of a percentage point (0.01%).
• Cash Reserve Ratio (CRR): The fraction of a bank's total deposits that it must hold in reserve with the central bank.