Indian Rupee It has fallen more than 11 percent against the dollar in 2022 — its weakest performance since 2013 and the worst among Asian currencies — as the U.S. Federal Reserve’s aggressive monetary policy spurred the greenback back.
Rupee in 2010 It closed 2022 at 82.61 to the U.S. dollar, down from 74.29 at the end of 2021, for the U.S. currency’s biggest annual gain since 2015.
The Indian tranche, however, outperformed other international currencies such as the Turkish lira and the British pound.
Volatility in the forex market, sparked by a rally in global oil prices following Russia’s war in Ukraine, has forced the Reserve Bank to tap into its reserves regularly, with imported inflation becoming a challenge for policymakers.
Since mid-October, the rupee has recovered from the volatility experienced earlier in the year and has remained close to its long-term trend, according to the RBI’s Financial Stability Report.
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Volatility in the financial market during the year due to the outbreak of the Russian-Ukrainian war in February, disrupting global supply chains, worsening inflation and maintaining inflation around the world.
As serious geopolitical crises engulfed the global economy, an aggressive US Federal Reserve began raising rates to control inflation. It made the dollar a safe currency, which led to massive investment from other countries.
Higher crude oil prices in the international market also weighed on the rupee. Foreign investors have taken a net sum of Rs 1.22 lakh crore from India’s equity markets and over Rs 17,000 crore from debt markets by 2022, due to a sharp hike by central banks.
As a strong dollar weighs on Indian trade, imported inflation becomes a major challenge for Indian policymakers.
Although the RBI spent over a hundred billion dollars to shore up the sliding rupee, it crossed the psychological mark of 83 on the greenback.
However, there is hope for the rupee in the new year. There are signs that the US Fed will further reduce rate hikes next year. Also, global investors have not lost faith in Indian markets, and FII income flow has started to improve.
Additionally, the fall in global energy prices, strong fundamentals of the Indian economy and inflation returning to the Reserve Bank’s comfort level will help the rupee gain some strength against the dollar.
Research analyst Dilip Parmar, HDFC Securities, said 2023 could start on a volatile note as rekindled Covid worries could be good for the dollar, while the second half is expected to be relatively stable as inflation and interest rates pick up.
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“We believe that the rupee may consolidate from 84 to 79 and register a slight decrease compared to the US dollar. Historically, we have seen when there was a decrease of more than 10 percent, the next year will be relatively stable and the rate will decrease by an average of about 2. Parmar added.
The depreciation of the rupee has raised concerns over the current account deficit (CAD), which, coupled with the widening of the trade deficit, will put further pressure on the Indian currency.
On January 3 (the first trading day of 2022), the rupee closed flat at 74.28. In the year February 24, when the Russia-Ukraine war began, and has fallen by 98 paise since then. On October 19, the rupiah breached the 83 mark for the first time due to unabated foreign capital, a strong dollar in overseas markets, rising mud prices and a sense of risk among investors.
Navneet Damani, Senior Vice President, Finance and Commodities, MOFSL, said the rupee has weakened significantly this year and the weakness was led by the 10 percent strength of the dollar against the major crosses.
“In 2022, major currencies, including the rupee, have fallen by an average of more than 10 percent. But the rupee’s volatility has been limited by RBI’s active intervention. There has been a slight erosion of reserves, but the central bank will now start again. It will strengthen the reserves and this will act as a buffer in uncertain times,” he said. .
In the coming year, Motilal Oswal Financial Services (MOFSL) expects the rupee’s volatility to remain high and this time central banks will remain hawkish, likely to support the dollar across the board.
He added, “USD-INR (Spot) is on a positive bias and we expect it to quote between 81.50 and 84.50 in the next quarter.”
Aditya Nayar, Chief Economist, ICRA, said the rupee will continue to be driven by trends in the dollar index and global sentiment, the latter of which is likely to steer well the trend in FPI flows.
The rupee gained 26 paise as the US currency retreated from highs in the previous 2022 trading session. On December 31, 2021, the rupee stood at 74.29 against the greenback.