The Australian dollar (AUD) has been attempting to rebound against the Indian rupee (INR) after falling to its lowest level since May 2020, after the Reserve Bank of Australia (RBA) sounded a more dovish note on its approach to further interest rate hikes.
Meanwhile, the Reserve Bank of India (RBI) has been intervening in the foreign exchange (forex) market, selling dollars in an attempt to prop up the rupee against a strong US dollar (USD). The RBI raised its benchmark interest rate by 50 basis points (bps) in September to 5.90% in response to high inflation.
What is the outlook for the AUD/INR exchange rate in the current uncertain economic environment? In this article we look at the recent volatility in the AUD/INR and the latest analysts’ forecasts.
What drives AUD/INR?
On the forex markets, currencies are traded in pairs, such as AUD/INR. The pair tracks how many Indian rupees – the quote currency – can be exchanged for one Australian dollar – the base currency. AUD/INR is known as a cross rate, which refers to a currency pair that does not include the US dollar.
The Australian dollar, also known as the Aussie, is the fifth most popular currency to trade.
The Australian economy is the 14th largest in the world based on nominal gross domestic product (GDP). The Aussie is frequently traded as a commodity currency, along with the likes of the Canadian dollar (CAD), New Zealand dollar (NZD) and Singapore dollar (SGD), as natural resources make up an important part of Australia’s economy.
Australia is an important exporter of raw materials, including iron ore, coal, oil and gas products and industrial metals. Mining accounts for 11.5% of the economy and natural resources amount to 68.7% of its exports. This results in commodity prices having a strong influence over the value of the AUD.
The Aussie is also often traded as a way to take a position on the Chinese economy, as exports to China account for 36.5% of its total exports.
The Indian rupee is a leading emerging market currency. India has overtaken the UK to become the world’s fifth largest economy by nominal GDP, according to International Monetary Fund (IMF) data. India’s biggest exports include petroleum products, jewellery, vehicles, machinery and pharmaceuticals. The country imports fuels, precious metals and gems.
Rising crude oil and natural gas prices driven by the Russia-Ukraine war have increased India’s trade deficit and contributed to inflation in 2022. The RBI’s monetary policy on controlling inflation with interest rates is a key driver for the value of the rupee, as higher interest rates attract investors who move their money into a country for higher returns, while lower interest rates encourage investment outflows.
The strong US dollar has been an important factor determining currency values this year, with many Asian currencies trading at record lows against the greenback.
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Aussie touches two-year low against rupee
The Australian dollar started the year at 53.51 against the Indian rupee and dipped to 52.50 in late January before it rallied to 57.41 in March, the high for the year.
The AUD/INR pair then retreated, reaching 53.09 on 12 May, as concerns about the impact of extended Covid-19 lockdowns in China weighed on the Aussie. The pair rebounded to 56.22 in early June, and then dipped to 53.60 by the middle of the month.
After reaching 56.71 in August, the Aussie began a downward trend, dropping to 51.12 against the rupee by 14 October, on expectations that the RBA could slow the pace of its interest rate hikes. But higher than expected inflation data indicated that the monetary policy committee (MPC) may turn hawkish again. At the same time, a widening trade deficit and falling currency reserves in India weighed on the rupee.
The AUD/INR pair reached 53.21 on 27 October, back to where it was trading in late September, and then softened towards 52.60.
According to an analysis by Mizuho Group:
“Market participants are often attentive of US dollar-selling market interventions by the Indian monetary authorities. At the beginning of September, the Indian monetary authorities carried out market interventions intermittently when the U.S. dollar/Indian rupee exchange rate was about to reach the INR 80 level, such that the exchange rate remained at the INR 79 level. Thereafter, the U.S. dollar appreciated significantly after the [Federal open market committee] FOMC meeting in the US, and the Indian monetary authorities intervened vigorously in the market by selling the US dollar.”
The RBA raised its benchmark interest rate by 25bps on 4 October to 2.6%, having started lifting rates in May. Its four previous hikes were 50bps, indicating a slowing pace of increases while other countries’ central banks continue larger hikes.
Inflation in Australia accelerated to 7.3% in September, following a dip from 7% to 6.9% in August. The quarterly rise of 7% for July to September was the highest since June 1990, data from the Australian Bureau of Statistics showed. The next RBA MPC decision is scheduled for 1 November.
India’s central bank has called an additional meeting for 3 November, ahead of its scheduled one on 7 December. The RBI has raised rates by 190bps since May.
The inflation rate in India rose to 7.41% in September, from 7% in August, according to data from the Ministry of Statistics and Programme Implementation (MoSPI). This was its highest level since April, when inflation soared to 7.9% for the first time since 2014.
Both the RBA and RBI are expected to continue raising rates in the coming months in an attempt to bring down their inflation rates, which will have an influence on their currencies.
How will the AUD trade against the INR in the future? We look at analysts’ forecasts below.
AUD/INR forecast: Will the rupee maintain strength against the Aussie?
An analysis from DBS noted the pressures on the value of the rupee:
“Many Asian currencies have buckled on the Fed’s aggressive stance to control inflation with higher rates at the expense of growth. India’s trade deficit widened 95% y/y to USD85b in the first eight months from weaker exports and elevated import growth.
“Our economist sees the current account deficit deteriorating to 3.9% of GDP in FY22 before narrowing to 2.7% in FY23. To bring inflation back into its 2-6% target, the central bank (RBI) will lift rates to 6% by December after three back-to-back hikes totalling 140 bps to 5.40%. To counter the cost-of-living crisis, India sought to control food prices by curbing rice, wheat, and sugar exports. Hence, there is a limit to interventions to support the INR.”
On the prospects for the Australian dollar, analysts at Malaysia-based Maybank note:
“Recent escalation of the war in Ukraine, confidence crisis in the UK and still sluggish China growth prospects have weakened the pro-cyclical AUD significantly. While RBA continues to maintain its firm commitment to getting inflation under control, Governor Lowe mentioned that the case for large hikes ‘diminished’ now that cash rate is closer to ‘more normal settings’. This heavily hinted consideration for smaller hikes in the horizon, contributing to drags on the AUD.
“China’s property malaise, growth fears have driven a steep price correction for base metals such as iron ore/copper this year but officials there have stepped up on measures – PBoC rate cuts, special loans for stalled projects (recent pledges to add quota for this purpose when needed) which lifted the metal prices and the AUD more recently.”
The October AUD/INR forecast for 2022 from Australian bank Westpac indicated the Aussie could weaken slightly to 52 by the end of the year. But over the longer term, the bank’s AUD/INR forecast was bullish, predicting the AUD could rise to 52.30 by the second quarter of 2023, 53.60 by the end of next year and 54 by the second quarter of 2024.
The Australian dollar to Indian rupee forecast from TradingEconomics showed the pair trading at 52.1396 by the end of this quarter and at 50.3466 in one year, based on global macro model projections and analysts’ expectations.
The AUD/INR forecast from algorithm-based forecaster Wallet Investor at the time of writing showed the pair stabilising for the rest of the year and ending December at 52.549. But the AUD/INR forecast for 2025 projected the Australian dollar could then strengthen to 58.943, up from 54.645 at the end of 2023.
The AUD/INR prediction from The Economy Forecast Agency estimated the pair could rise to 55.36 by the end of 2025, after declining to 50.42 by the end of 2022.
Given the volatility and unpredictability of forex markets, analysts have yet to issue an AUD/INR forecast for 2030.
When evaluating any AUD/INR forecast, it’s important to remember that currency markets are highly volatile, making it difficult for analysts and algorithm-based forecasters to come up with accurate long-term predictions.
We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.
FAQs
Why has AUD/INR been falling?
The Australian dollar weakened to a two-year low against the Indian rupee in mid-October as the Reserve Bank of Australia raised interest rates at a slower pace, indicating a more dovish approach to monetary policy.
Will AUD/INR go up or down?
No one can say for sure. The direction of the Aussie dollar against the rupee will depend on central bank policy on inflation and interest rates in Australia and India as well as US Federal Reserve policy and international trade flows.
When is the best time to trade AUD/INR?
The best time to trade on forex markets is around the release of major economic announcements, such as trade data, inflation and interest rates.
Is AUD/INR a buy, sell or hold?
How you trade the AUD/INR pair is a personal decision depending on your risk tolerance and investing strategy. You should do your own research to take an informed view of the market. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.
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