The Indian rupee depreciated by around 10 per cent against the US dollar in 2022 on account of sharp appreciation of the greenback, as the US Federal Reserve tightened its interest rate to check inflation amid the uncertainties surrounding the Russia-Ukraine conflict.
How did the rupee perform in 2022?
The rupee was the worst-performing Asian currency in 2022, witnessing a fall of around 10 per cent against the greenback. This decline was mainly on account of appreciation in the US currency on safe haven appeal amid fears of recession and inflation across many parts of the world and Russia-Ukraine war.
During the year, the rupee fell to a lifetime low of 83.2 against the dollar. Compared to rupee, depreciation of other Asian currencies was to a lesser extent. During the year, Chinese Yuan, Philippine Peso and Indonesian Rupiah fell around 9 per cent. South Korean Won and Malaysian Ringgit declined by nearly 7 per cent and 6 per cent, respectively.
However, the Reserve Bank of India (RBI) heavily intervened in the forex market to defend rupee. Since the beginning of 2022, the country’s foreign exchange reserves have fallen by $70 billion. It stood at $562.81 billion as of December 23, 2022, the latest RBI data showed.
“Reserves have witnessed a bit of erosion but the central bank is now starting to again build up its reserves and that would act as a buffer in times of uncertainty,” said Navneet Damani, senior vice president (currency and commodity) Motilal Oswal Financial Services (MOFSL).
What was the reason for capital outflows?
The US Fed aggressively raised interest rates by 425 basis point (bps) in 2022 in its fight against inflation. This led to a higher interest rate differential between the US and India, and investors pulled out money from the domestic market and started investing in the US market to take advantage of higher rates.
In 2022, foreign portfolio investors (FPIs) pulled out Rs 1.34 lakh crore from the Indian markets – the highest-ever yearly net outflow. They withdrew Rs 1.21 lakh crore from the stock markets and Rs 16,682 crore from the debt market in 2022, putting pressure on the rupee. Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows tougher, analysts said.
What is the outlook on rupee for 2023?
According to forex analysts, although the outlook on the rupee remains weak in the near future, the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy.
“The terminal interest rate for the US Fed is anybody’s guess, but it cannot be the case that their monetary policy will be tightened endlessly. When the (US Fed) tightening is over, the tide will surely turn,” Reserve Bank of India Governor Shaktikanata Das said during the December monetary policy announcement.
