Year-ender 2022: Three factors that will drive INR/USD rate next year

Year-ender 2022: Three factors that will drive INR/USD rate next year


2022 is over and turned out to be the worst year for the Indian rupee after 2013, the period when the country came under a fragile nation category. Even after being one of the fastest-growing nations in the world with a stable domestic macro environment, the rupee depreciated more than 10% and hovered near 83 a dollar. If we look at the rear-view mirror, we see the Indian economy stands out stronger among many Asian and developed nations but the rupee is the worst-performing currency among the Asian basket.

2022 Recap

Foreign fund outflows: Foreign funds have sold worth $16.76 billion in equities and $2.14 billion in bebt

Inflation Worries: Retail inflations remained above RBI’s tolerance band of 2% to 6% through 10 out of the last 11 months.

Negative Real Rates

Unwinding of the carry trade: On a YTD basis, Long INR/Short USD given a negative 7% return as per the Bloomberg calculation

Slower Global Growth: Means lower export and lower foreign currency earnings

Hawkish Central Banks: Monetary policy tightening and high-interest rate scenario

Volatile imported commodity prices in particular Crude Oil: The prices of domestic petrol, diesel and gas prices hovering near multi-year high

Delay in the inclusion of domestic bonds in the Global Bond Index: Due to regulatory and settlement-related concerns, India’s bond inclusion in the Global bond index was postponed.

High Trade Deficit: Nation’s trade deficit widens to $283.6 billion for the current year

Theme of 2023

Fed Policy Will Continue to Drive Asset Prices in 2023: The Fed’s pivot to a less aggressive monetary policy is likely to set the tone for the markets in 2023 which could turn the dollar negative and risk positive. Inflation is likely to come down, in combination with a significant slowdown of the global economy.

Balancing Act from Central bank: The US Fed’s dual mandate has been full employment and stable prices. It does not want to sacrifice jobs to tame inflation but, instead, delicately balance the two. While RBI may also give priority to growth with inflation starting to come down with better sowing and lower crude oil prices. The base effect will also give room to the central bank to pause the rate and think of growth.

Technical Recession: US is expected to be in recession but not in a deep recession with such a robust labour market. Indian economy continues to grow amid strong domestic demand while global trade may remain lacklustre.

Believe in India Story

While a stronger dollar, foreign fund outflows and higher energy prices have created a major headwind for the rupee in 2022. India has better growth potential, lower inflation, and less sovereign and private debt, yet currencies trade at crisis-level valuations. India’s growth story is supported by the post-pandemic recovery, a manufacturing resurgence, commodity tailwinds, digitization and favourable political stability.

Despite global worries over the war in Ukraine, China-US tensions and an impending recession in the US, India seems to be well-positioned for a constructive 2023 and beyond. We believe in India’s growth story which could attract foreign fund inflows.

History of the Rupee Falling more than 10%

If history is a guide, then we could see consolidation in the rupee in 2023. Since 1992, there were five instances when the rupee depreciated more than 10% (Year: 1992 (-10.9%),1995 (-10.8%), 2008 (-19.2%), 2011 (-15.8%), 2013 (-11%) and then next year remained in a narrow range and ended average depreciation of merely 2.1%.

Where can the rupee go?

We believe the rupee could trade between 79 and 84/USD in 2023. The first half of next year could be weak for the rupee while in the second half as the interest rate peak-out and inflation come back to a normal level, the rupee could start appreciating along with the other Asian currencies.

The author, Dilip Parmar is Research Analyst, HDFC Securities

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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