• Despite being one of the fastest growing countries in the world, the rupee depreciated by more than 10% and remained around 83/dollar. Read on to know if INR can touch 84/USD in 2023:
2022 has come to an end and proved to be the worst year for the Indian rupee since 2013, the period when the country came under the fragile nation category. Despite being one of the fastest growing countries in the world with a stable domestic macro environment, the rupee depreciated by over 10% to close at 83 per dollar. If we look at the rear-view mirror, we see that the Indian economy is strong among many Asian and developed countries, but the rupee is the worst performing currency in the Asian basket.
2022 recap
Foreign fund outflow: Foreign funds have sold $16.76 billion worth of equities and invested $2.14 billion
Inflation concerns: Retail inflation remained above the RBI's tolerance band of 2% to 6% through 10 of the last 11 months.
- negative real rates
- Unwinding of the carry trade: On a YTD basis, long INR/short USD has given a negative 7% return, according to Bloomberg calculations
- Slower global growth: means fewer exports and less foreign exchange earnings
- Hawkish Central Bank: Monetary policy tightening and higher interest rate scenario
- Volatile prices of imported goods, especially crude oil: Domestic petrol, diesel and gas prices are near multi-year highs
Inclusion of domestic bonds in global bond indexes delayed: Due to regulatory and settlement concerns, the inclusion of India's bonds in global bond indexes was postponed.
- Higher trade deficit: The country's trade deficit widened to $283.6 billion for the current year
2023 theme
- Fed policy to continue asset prices in 2023: The Fed's pivot to less aggressive monetary policy is likely to set the tone for markets in 2023 which could make the dollar negative and risk aversion positive. Inflation is likely to moderate with a significant slowdown in the global economy.
Balancing Act from the Central Bank: The dual mandate of the US Fed has been full employment and stable prices. It does not seek to sacrifice jobs to contain inflation, but instead delicately balances the two. While RBI may also prioritize growth with inflation coming down on account of better sowing and reduction in crude oil prices. The base effect will also give the central bank room to pause rates and think about growth.
Technical Recession: The US is expected to be in a recession but not in a deep recession with such a strong labor market. The Indian economy continues to grow amid strong domestic demand, while global trade may remain sluggish.
story of faith in india
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 lower sovereign and private debt, yet currencies trade at crisis-level valuations. India's growth story is supported by post-pandemic recovery, manufacturing revival, commodity tailwinds, digitization and favorable political stability.
Despite global concerns over the war in Ukraine, Sino-US tensions and an impending recession in the US, India is well positioned for a creative 2023 and beyond. We believe in India's growth story which can attract foreign fund inflow.
History of rupee falling more than 10%
If history is a guide, we may see consolidation in the rupee in 2023. Since 1992, there were five instances when the rupee depreciated by more than 10% (years: 1992 (-10.9%), 1995 (-10.8%), 2008 (-19.2%), 2011 (-15.8%), 2013 (-11%) and then stayed in a narrow range the following year and ended up with an average depreciation of only 2.1%.
Where can the rupee go?
We believe that Rupee may trade between 79 and 84/USD in 2023. The first half of next year may turn out to be weak for the rupee, while in the second half as interest rates peak and inflation returns to normal levels, the rupee may start rising along with other Asian currencies.
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