Rupee tipped to weaken gradually amid broad dollar strength as 2025 kicks off

The Indian rupee is likely to open flat-to-slightly-lower on Wednesday, with traders expecting the currency to weaken gradually in the near-term as a hawkish Federal Reserve and expectations surrounding Donald Trump's second term as U.S. President keep the dollar on the front foot.

The 1-month non-deliverable forward indicated that the rupee will open at 85.62-85.63 against the U.S. dollar, compared with its previous close of 85.6150.

The local unit dipped to its sixth consecutive record closing low on Tuesday, pressured by a decline in its regional peers.

The rupee declined for the seventh consecutive year in 2024, largely on the back of multiple headwinds in the final quarter of the calendar year.

Regional currencies were mostly weaker, with several markets closed for the New Year holiday, while the dollar index hovered close to its highest level in over two years.

The prospect that the Fed will hold interest rates higher-for-longer alongside expectations of policies to be introduced by U.S. President-elect Donald Trump have boosted the dollar and U.S. bond yields.

Meanwhile, the rupee has faced additional pressure on the back of local headwinds including India's slowing growth and a widening trade deficit.

"Rupee is likely to remain on a steady depreciation trajectory," said Abhishek Goenka, chief executive at FX advisory firm IFA Global.

"We may see a conscious, deliberate, controlled correction of (rupee's) overvaluation to support growth," Goenka said.

The rupee's 40-currency trade-weighted real effective exchange rate, a measure of its competitiveness, stood at 108.14 in November, indicating the currency was overvalued by around 8%.

The rupee's relative overvaluation is a potential drag on India's exports. Traders will also watch out for any potential changes in the Reserve Bank of India's forex intervention strategies over 2025 under the its new governor.