Rupee’s outlook depends largely on global monetary policy moves
New Delhi [India]Dec 31 (ANI): Tightening of monetary policy by several central banks to contain inflation, the war in Ukraine leading to crude oil price rises and subsequent realignment in the global energy supply chain, and strengthening of the US dollar index kept the Indian currency in 2022 under pressure.
The Indian rupee has been in the news for a significant portion of 2022 due to its steady depreciation.
In 2022, the rupee depreciated more than 11 percent on a cumulative basis, data showed. In mid-October, it broke the 83 mark against the US dollar, reaching an all-time low.
However, it has outperformed most Asian peer currencies during the current fiscal year, including the Chinese renminbi, Indonesian rupiah, Philippine peso, South Korean won and Taiwan dollar.
The US Federal Reserve’s policy rate is now at a target of 4.25-4.50 percent, the highest level in 15 years, which was near zero in early 2022. An increase in policy rates in the US and other advanced economies generally leads to a depreciation of emerging market currencies such as the rupee.
“The Indian rupee has had a mixed year in 2022 in terms of relative performance. During the first three months it underperformed due to higher oil prices. However, it bounced back strongly in the middle of this year due to the fall in energy prices and aggressive intervention But since October, we’ve seen Rupee once again underperform its peers, but this time due to higher-than-usual demand from oil importers,” said Shrikant Chouhan, Head of Equity Research at Kotak Securities. Chouhan added that 2023 could be a year of two halves.
In explanation, he said “the seeds of a global economic slowdown could germinate” in the first half due to tightening monetary and fiscal policies and China’s alarming Covid situation.
“We expect the (US) Fed and other central bankers to take note of a dramatic fall in inflation and growth and lower interest rates in the second half. encourage,” said Chouhan. of Kotak Securities said, adding that he sees Rupee versus the US Dollar in a wide range of 80.00-85.00/8.50 in 2023.
Not all is doom and gloom for Rupee fundamentals, however, as the US Dollar index is currently down from its peak of 114 to around 105.
According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, “The dollar will stabilize and start to weaken when the (US) Fed pauses in the second quarter of 2023. RBI has done a good job of intervening in the forex market to the rupee and manages the forex reserves.” Usually, the RBI intervenes in the markets from time to time through liquidity management, including through the sale of dollars, to prevent a sharp depreciation of the rupee.
At the start of 2022, total forex reserves were $633.61 billion, currently $563.499 billion. Much of the decline can be attributed to the intervention of RBI and an increase in the cost of imported goods.
“The RBI intervention in the forex spot market will curb any upward momentum in USD/INR rates. This will help stabilize exchange rates around 83 – 87 in 2023,” said Sumeet Bagaria, executive director at Choice Broking, adding that it would be interesting to see how the RBI handles the situation.
Going forward, much of the rupee’s movement will also depend on the monetary policy of the US Federal Reserve.
“Looking ahead to 2023, the first half will still be unpredictable, as the U.S. ending course is still unknown and the war between Russia and Ukraine is not yet over. As a result, the first half of 2023 may show some additional weakness , but the second half may be better for the rupee as US interest rates may peak,” said Santosh Meena, Head of Research at Swastika Investmart.
For 2023, Meena sees Rupee in a tight range of 80.0-83.5.
Another breather may come from the drop in international crude oil prices, currently trading at around USD 78-80 a barrel. It peaked at around USD 130 a barrel earlier this year.
“We expect the rupee to trade negatively between 84 and as low as 85 against the US dollar as deteriorating global risk sentiment may put downward pressure on the rupee. The rupee is currently trading around 82.8 against the US dollar. US currency. Weak global markets could lead safe haven flows to the US dollar. However, a sharp fall in the price of crude could prevent a sharp fall in the rupee,” said Mohit Nigam, fund manager and head – PMS, Hem Securities.
A rupee depreciation also has its own benefits as it typically boosts exporters’ earnings.
What is India doing to reduce over-reliance on the US dollar and subsequent internationalization of the rupee? The RBI had recently announced several measures to diversify and expand sources of currency financing to reduce exchange rate volatility and dampen global spillovers.
Among them, the most important is that in mid-July 2022, the RBI introduced an additional scheme for invoicing, payment and settlement of exports/imports in Indian currency. If the mechanism pays off, it could go a long way in long-term internationalization of the Indian rupee.
Talks between India and the UAE are already underway for a bilateral rupee-dirham trade.
A currency can be called “international” if it is widely accepted worldwide as a medium of exchange. (ANI)