Rupee may not just stabilise, but appreciate from current levels: RBI Dy Guv Poonam Gupta

Mumbai: RBI Deputy Governor Poonam Gupta posited on Wednesday that the Indian rupee could not only stabilize but potentially appreciate from its current levels, considering the 13.1% depreciation over the past 18 months to be a temporary dip. Speaking at the 13th SBI Banking & Economics Conclave, she emphasized that market analysts had anticipated this appreciation when capital flow measures were initially proposed.

Gupta argued that India's current account deficit (CAD) is poised to shrink further in the years ahead, bolstered by India's established strengths in services exports and remittances, along with emerging advantages such as merchandise exports. She highlighted that the CAD should continue to decrease due to India's growing success in merchandise exports, alongside the presence of traditional strengths in services and remittances.

The deputy governor also expressed optimism about India's capital account situation. She anticipated a turnaround in the capital account later in the current financial year, with favorable trends likely to persist. She pointed towards stretched valuations elsewhere, the saturation of AI-led investments, robust domestic macroeconomic fundamentals, high real and nominal GDP growth, strong domestic investment cycles, healthy bank and corporate balance sheets, measures to attract capital, and the increasing trend of foreign direct investment (FDI) as factors that could support capital inflows.

Additionally, Gupta mentioned that the inclusion of Indian bonds in global indices could further facilitate capital flows.

Gupta affirmed that the Reserve Bank of India's capability to handle external pressures remained crucial for stabilizing the rupee. She affirmed the RBI's commitment to maintaining orderly conditions in the foreign exchange market, and the bank's capacity to manage significant CAD or net BOP deficits over time. She noted that India's current account deficit, expressed as a percentage of GDP, has been consistently lower than levels typically deemed prudent for emerging market economies.

The structural strengths of India, namely net services exports and remittances, were described as substantial and resilient enough to absorb the merchandise trade deficit, thereby maintaining the CAD below 1% of GDP. Gupta also noted that recent shocks in oil and gold prices temporarily raised the CAD, while the capital account surplus lagged behind the CAD, leading to a negative BOP in recent years.