Rupee headed for 83 and beyond, as rate hike fears persist

• The Indian rupee is now headed for 83 and beyond against the US dollar amid heightened fears of further rate hikes due to stubborn inflation.
• Rupee kicked off 2023 at 82.75 against the US dollar and appreciated to 80.98 by January 20, but has since then lost all the gains.
• Weak domestic markets, rise in crude oil prices and worries of further rate hikes by the US Fed to tame inflation could lead to rupee depreciating going forward.

The Indian rupee is now headed for 83 and beyond against the US dollar as fears of further rate hikes persist following robust US economic data. While the rupee staged a recovery in January to appreciate to under 81 levels, it could not sustain the momentum.

Rupee kicked off 2023 at 82.75 against the US dollar and appreciated to 80.98 by January 20, a level it had touched in November last year. The reversal in rupee happened on January 21, and it has since depreciated by 2.4% to 82.9, erasing all the gains it had made until then since the beginning of 2023.

Robust US jobs data and inflation persisting above US Fed’s tolerance levels have also stoked fears of further rate hikes. While US Fed chair Jerome Powell said that disinflation is underway, he cautioned that further rate hikes are likely. Now, with economic activity in the US remaining robust, rate hike fears have risen.

83 and beyond the new target for rupee, say analysts

While the rupee touched the 83-level once in October last year, it recovered smartly. However, it could be headed there again, according to analysts.

“Over the next one month, we could see USD-INR within a range of 82-83.5 on spot. Over three months, the range is 82-84.5 on spot,” Anindya Banerjee, vice president - currency derivatives & interest rate derivatives at Kotak Securities, told Business Insider India.

Weak domestic markets, rise in crude oil prices and worries of further rate hikes by the US Fed to tame inflation could lead to rupee depreciating going forward.

“We will continue to expect 82.50 to offer such support for upswings, which ideally aims for 83 and beyond,” said Anand James - Chief Market Strategist at Geojit Financial Services.

India’s love for cheap Russian oil making matters worse for rupee

To make matters worse for rupee, India’s rupee trade plan with Russia is fizzling out due to an increase in gap between exports and imports, caused by a spurt in India’s crude oil imports from Russia, according to a Bloomberg report.

Russian crude oil imports accounted for just 0.2% of all crude oil imports by India in FY22. Fast forward to November, Russian crude oil imports rose dramatically to nearly 23%.

India’s trade deficit with Russia widened from $6 billion at the end of FY22 to $25 billion by November 2022, and Russian banks don’t want excess rupee piling up with them as a result, the report added.

Flurry of economic developments behind increased rupee volatility

Analysts added that the high volatility in rupee is due to a multitude of factors, ranging from anticipation of less rate hikes, intervention by the Reserve Bank of India, high foreign institutional investor (FII) outflows, Budget 2023 and the rate hike decision of the US Fed and the RBI.

“Rupee has been caught between diverging forces of the weak US Dollar Index and FPI outflow from India. Add to this the withdrawal of Adani FPO, causing USD-INR to swing from 80.87 to back towards 83 levels,” Banerjee said.

However, analysts maintain that RBI’s intervention and corporate dollar selling in the first three weeks of January helped the rupee appreciate against the US dollar.

“The major calmness in Indian rupee was due to the bunched up corporate dollar selling seen by major big-wig companies who took the opportunity of the mute market in the initial few days of the new year. RBI too kept a tight leash on rupee by intervening time and again,” Heena Naik, research analyst – currency, told Business Insider India.

The weakness in rupee is also reflected in the real effective exchange rate (REER), which fell from 100.96 in November to 97.45 in December in the 6-currency basket, according to RBI data.

REER is a weighted average of a currency compared to a basket of other major currencies. An increase in REER means exports are becoming expensive and imports cheaper. A decrease in REER, on the other hand, means exports are becoming cheaper while imports are becoming expensive.

Large FPI outflows negate gains from a weak dollar index

In November last year, a weak dollar index was one of the drivers of rupee appreciation. However, also aiding the rupee back then were strong inflows from foreign portfolio investors (FPI), which amounted to ₹33,847 crore.

However, fast forward to January, the scenario has changed drastically. Despite the dollar index falling 1.5% in 2023 so far, FPI outflows of ₹32,198 crore have negated the benefits of a weaker dollar index.

“Rupee has depreciated in spite of the weakness in the US Dollar Index, due to the aggressive selling from FPIs,” Banerjee added.

When FPIs pump money in India, they bring in US dollars and other foreign currencies, and when they pull out, they withdraw in US dollars and other foreign currencies.

January also witnessed the largest FPI selling in Indian equities since June last year, at ₹28,851 crore. Banerjee explained that the withdrawal of the Adani Enterprises follow-on public offer (FPO) also played its part in weakening the rupee.

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