The Indian currency is nearly 10 percent down against the US dollar in the last one year.
From 75 per dollar on February 25, 2022, the rupee has fallen to 82.64 per dollar on February 28, 2023.
While India's economic outlook remains bright, the rupee's fall against its peers has kept investors worried.
Not a lone loser against the dollar
The rupee has taken a hit because of the fluctuations in crude oil prices, heavy capital outflow by foreign investors and the rise of the dollar index.
However, these factors have impacted other currencies also.
A longer spell of rate hikes has shot up the US dollar index higher, exerting pressure on the greenback's global peers. So, the rupee is not the only currency which has weakened against the dollar. In fact, data shows that the Japanese yen is 18 percent down against the US dollar in the last one year.
The British pound is down over 11 percent while the Chinese yuan is down about 10 percent against the US dollar in the last one year.
Eurozone's currency euro is down over 6 percent against the US dollar in the same period.
Fed policy and crude oil prices are the two most important factors for the rupee. Analysts and brokerage firms expect the domestic currency to remain volatile at least for the year.
We collated the views of analysts on the trajectory of the rupee. Take a look:
Aditi Gupta, Economist, Bank of Baroda
The trajectory of USD/INR in the next year will be determined by both global as well as domestic macro fundamentals. Just like in 2022, perhaps the most important driver of the USD/INR rate this year will be the trajectory of the dollar.
Amongst domestic factors, India’s current account deficit will be the key factor impacting USD/INR. Apart from this, FPI flows and oil prices will also be important for the exchange rate going forward.
On a quarterly basis, we see USD/INR inching towards 82.5 per dollar in Q1, and 83 per dollar in Q2 as the Fed rate hikes are materialised. We may also see the rupee inching closer to the 84 per dollar mark, towards the end of FY24. However, a smaller CAD and favourable growth differential will lend some support to the rupee.
Dilip Parmar, Research Analyst, HDFC Securities
The sticky global inflation will make the rate market “higher for longer” which in turn keeps the dollar biding stronger. Foreign investors are likely to remain cautious amid geopolitical worries, slower global growth and risk-averse sentiment.
Better import covers, comfortable forex reserves, stable international commodity prices, FDI inflows and shifts in monetary policy are some of the triggers that make the rupee resilient among the regional currencies.
The RBI may intervene on both sides for a stable currency and the adequacy of reserves.
Looking at the known factors, we believe Spot USDINR to consolidate between 81.50 to 84.50 in the coming fiscal year.
Heena Naik, Research Analyst - Currency, Angel One
With respect to the coming quarters of FY 2023-24, we expect the overall trend of the USDINR Spot to remain bullish. The USDINR Spot is likely to break the crucial 83-mark that the RBI has been actively defending for the past few days.
In the mid-year of 2023, we may see the local unit brushing pass off 84.20-84.70 levels. If the USDINR Spot breaks these levels, we may even witness the currency touching the 86 mark by the end of Dec’23.
According to the World Bank, the year 2023 is likely to witness a massive global recession, which will also adversely impact the Indian economy. This means that we could witness huge outflows from the rupee-denominated assets. This could result in the prices of equity shares moving down which could negatively hit Indian investors.
The expected rise in crude oil prices and worries of further rate hikes by the US Feds to tame inflation could further deteriorate the case of the Indian rupee.
Naveen Mathur, Director - Commodities and Currencies, Anand Rathi Shares and Stock Brokers
In 2022, rupee fell during all the months, except for November with broader dollar strength, narrowing yield differentials & widening balance of payments (BoP) deficit as the major reasons.
The US Fed funds rate currently at around 4.75 percent has more room left as current indications are for another 75 bps rate hike during the year which could narrow the interest rate differentials between the two countries and further lead to outflow concerns from domestic markets weighing on rupee sentiment.
The dollar index could stay elevated in the short term; it may lead to a fall in expectations of a Fed pivot in 2023 keeping the rupee on the higher side in coming quarters.
With crude oil prices also likely to witness a floor near $70 levels in the short term, a deteriorating Russian situation where more sanctions on the Russian economy this year could create supply tightness globally and keep oil prices elevated, there will be depreciation bias in the rupee this year.
Finally, the rupee might also be under pressure if short-term yields remain elevated in the first half of the year where we might see the rupee depreciating to near 85 levels by the end of the third quarter.
Anuj Choudhary, Research Analyst, Sharekhan by BNP Paribas
We expect the rupee to trade with a negative bias on the strong dollar amid expectations of further rate hikes by the US Federal Reserve.
Terminal rates expectations have been revised upwards to 5.4 percent, signaling another two or three 25-bps rate hikes by Fed.
Higher interest rates for longer may put pressure on risk assets. India’s inflation may also see an uptick in higher prices of vegetables and fruits due to the summer season.
However, markets may also take cues from RBI’s monetary policy outcome in April. There are expectations that RBI may hike rates further to tame inflation. We expect USDINR to trade in the range of 81.80-84.20 with an upward bias over the next two-three months.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
