The performance of the Indian National Rupee (INR) has been one of the worst among its Asian peers. RBI intervention, inflation trajectory, movement of crude prices, and pace of liquidity unwinding by global central banks is expected to guide the INR in the short to medium term says experts.
The Indian rupee will end the year on a weaker note against the dollar for another year. Historically, the rupee has depreciated against the dollar in the range of 1-3 per cent YoY, and this year was no different as the INR depreciated almost 2 per cent versus the US dollar. The rupee traded in the range of 72.263 to 76.419 and the rupee recovered somewhat from the lowest level witnessed earlier in the month.
“One of the major factors for the decline of the INR was the eminent liquidity tapering by the US Fed and other central banks. FIIs have pulled out over Rs 30,000 crore from the Indian equity market leading to some nervousness in the key indices as it trades a few percentage points below its all-time high. The concerns of liquidity tapering and rising inflation make it tough for central banks to stay put with accommodative policy, the scenario will force liquidity tightening and rate hikes by the RBI somewhere in 2022 and its effect is already reflected in the performance of the INR,” said Nish Bhatt, Founder and CEO, Millwood Kane International - an investment consulting firm.
Experts point out that due to India's substantial foreign exchange reserves and greater foreign direct investment inflows, the INR was among the most stable currencies in Asia-Pacific in 2021. RBI had around $635.83 billion in foreign exchange reserves on December 10, 2021, up from $578.57 billion on December 11, 2020 till the last quarter of 2021. The stability of the native currency was largely due to this inflow. The INR's range of 72 to 75 versus the USD from March 2020 to November 2021 is evidence of this. In the quarter ended September 2021, this inflow fell to $13.59 billion. FPI was a net seller in last quarter and booking profits on the Indian equities on the other hand weakness in the crude is supporting the Indian currencies.
“The current account deficit will increase rapidly along with the rising inflation is a worrying sign for the RBI as that increases the pressure to increase interest rate. If that happens, the rupee could weaken more in the first half of 2022,” said Kshitij Purohit, Lead Currencies and Commodities, CapitalVia Global Research Ltd.
The INR declined 1.9 per cent this quarter as global funds pulled $4.2 billion of capital out of the country’s stock market, leading to the benchmark S&P BSE Sensex Index falling by about 10 per cent below an all-time high. Besides this India's trade deficit widened to an all-time high of about $23 billion in November 2021.
“The monetary policy divergence along with widening current account gap have accelerated the rupee depreciation. The weaker currency is likely to support exports, but at the same time could pose a serious threat for imports, while the Indian economy is on a revival path. The fact is that the one-year forward price-to-earnings ratio for the Indian Sensex is near 21, compared to 12 for MSCI’s Emerging Markets Index, which could trigger equities to slide down even further. The rupee could certainly fall below the previous record low of 76.9088 reached in April 2020, but not to the extent of 78 per dollar as are reported elsewhere, because the fundamentals of the Indian economy are relatively strong. However, oil prices could be another important factor impacting the rupee position,” said Rajendra K. Sinha, Professor and Chairperson - Centre of Excellence in Banking, JAGSOM.
