Can you expect a pre-election spike in rupee? Here's what analysts say

The rupee hovered around 82.85 against the US dollar on Friday, on course to finish the week 0.2 per cent stronger, amid consolidation in the dollar index after three-month highs scaled last month. The Indian currency has recovered about 0.6 per cent from an all-time low in November last year.

Even as the dollar index, which measures the American currency against six major peers other than the rupee, has been trading sideways amid speculations of a higher-for-longer interest rate in the US, the rupee is largely left undamaged.

What does the road ahead look like for the rupee against the US dollar?

Many analysts expect the rupee to gain some more strength in the coming weeks, given the decreasing volatility in the currency that has prompted traders to scout for currency pairs other than the dollar-rupee (USD-INR).

Muted volatility in the rupee is prompting banks and corporate treasuries to dabble more in the euro-dollar, pound-dollar and dollar-yen currency pairs in search for returns, according to a report by news agency Reuters.

Meanwhile, the Centre's ambitious fiscal consolidation path, targeting to contain fiscal deficit -- or the amount by which a government's spending exceeds its revenue in a financial year -- at 5.1 per cent of the country's GDP in FY25 ad 4.5 per cent the next year, has supported the rupee against the greenback.

Typically, a wider fiscal deficit puts pressure on the rupee against its major currencies, whereas fiscal prudence promotes stability in the currency.

What analysts say?

In the first half of the financial year, the rupee will primarily be impacted by the Lok Sabha assembly elections, due in April-May, whereas central bank's decisions on key interest rates globally will take centrestage in the current markets in the second half, said Jateen Trivedi, VP Research at LKP Securities.

"Elections will play a significant role, with a pre-election rally expected once election dates are announced," Trivedi added.

Some analysts say that fund flows into the economy, which helped the rupee stay resilient in 2023, will continue to promote stability in 2024.

In 2023, the rupee finished 0.8 per cent weaker against the American currency, a drastic improvement from deprectiation of more than 11 per cent the previous year, on the back of foreign funds inflows, improving macroeconomics and cooling consumer prices.

In the next 3 quarters,  Dilip Parmar, Research Analyst, HDFC Securities maintains that rupee will trade between 83.7 to 81 with a positive bias. He added that going by the historical trend, the rupee strengthened before the election in expectation of political stability. However, once the government took charge, the macro and demand-supply of the dollar directed the trend. Once again, the odds are in favour of the ruling party which will provide stability in domestic macro. Apart from the political stability, the market is also pricing in for stable foreign inflows which will support the local rupee.

Technical view: Where can you expect the rupee in the next few weeks?

"With elections around the corner, the rupee may see positive gains if it maintains levels around 83. Immediate resistance for the rupee is seen around 82.50, and a breakthrough above this level could see the rupee appreciating further, potentially reaching 82.00, especially considering the resistance faced by the dollar index around 105," added Trivedi.