Outlook 2023: Here's why the rupee will depreciate against the dollar in H1

 

• As global inflation and economic concerns continue to weigh on risk sentiment, the rupee is expected to weaken in the first half of 2023. Full year range 80-85/usd

The Indian rupee emerged as Asia's worst performing currency in 2022, depreciating nearly 11.5% against the US dollar due to strengthening of the greenback and capital outflows by foreign investors. FIIs pulled out around ₹2.75 lakh crore this year. The dollar has strengthened amid concerns over the Russia-Ukraine conflict, a global recession and global inflation, which has led to a rise in US bond yields, leading to an appreciation of the US dollar.

We expect the rupee to depreciate against the US dollar in the first half of 2023 as global inflation and economic concerns are impacting risk-on sentiments. Supply chain disruptions and food inflation are also expected to increase from 2022 to 2023. The Russia-Ukraine conflict has failed to reach any resolution, and any prospect of a ceasefire seems remote in the near future. The resurgence of COVID-19 may also impact the markets. Most global institutions such as the IMF and the World Bank have revised global growth forecasts for 2023 due to the slowdown in the world's three largest economies - the US, China and the Eurozone.

The IMF projects global GDP to slow from 6.1% in 2021 to 3.2% in 2022 and 2.7% in 2023. recession on record. All these factors could put pressure on riskier currencies like Euro, Pound and Rupee.


While the outlook for the Indian currency looks weak in the near term, we do not expect a sharp decline in the long term as India is expected to remain the best performing major economy which may be supportive for the rupee at lower levels . India's GDP is projected to grow by 6.8% in 2023. Since India is expected to grow at the fastest rate, the second half of 2023 could be positive for the domestic currency. It is to be noted that in the last few months we have seen inflation coming down in most of the advanced economies, partly driven by reduction in crude oil and other commodity prices.

If commodity prices remain under control, we may see some narrowing of the ballooning twin deficits ie current account deficit and trade deficit. The US Federal Reserve may take its foot off the rate hike pedal in the later part of 2023 as there may be visible evidence of inflation falling towards the 2% target.

In 2023, we expect the rupee to trade in the range of 80-85 per dollar with further weakness in the first half of the year. The current market price (spot) of USD/INR is ₹82.83.