India: Are things looking better for the rupee?


Published: Mon 20 Mar 2023, 11:53 AM

In mid-January this year, the data on US retail sales for December 2022 came out weaker than expected, so concerns about economic growth for the coming year mounted. Risk sentiment suffered, with the S&P 500 losing more overnight than it had in a month, and this looked like an obstacle for the Indian rupee. “It’s natural for emerging-market currencies to weaken during risk off”, explains Churchil Bhatt of Kotak Mahindra Life Insurance Co.

By Deepak Jain

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Of all the emerging-market currencies in Asia, the Indian rupee performed the worst in 2022, losing over 10 per cent of its value. Throughout the year, the rupee was battered by the US Federal Reserve’s aggressive rate-hiking schedule and India’s own gaping account deficit. “A substantially wider current account deficit” will continue to hold back the rupee into 2023, according to Axis Bank Ltd.

On the other hand, the Indian currency kicked off the second week of January with three consecutive days of gains, and technical analysis revealed that it fell below its 100-day moving average, which is a bullish signal in the world of forex trading. “The rupee may see some more gains with authorities unlikely to let the currency slip too much before the budget”, suggested Abhishek Goenka of India Forex Advisors, referring to the federal budget meeting scheduled for early February.

To enhance our forex trading prowess, let’s look back in more detail at the year from which the rupee has just emerged, especially because it may offer us clues as to where the currency is headed.

After the Invasion

In the immediate aftermath of Russia’s invasion of Ukraine, oil prices jumped due to fears that retaliatory sanctions could interfere with flows from Russia. India’s energy imports rank among the largest on the globe. This makes the rupee unusually sensitive to spiking oil prices, so India’s account deficit opened up wider. In addition, only a five per cent slip in the rupee can accelerate inflation by as much as 20 basis points (bp).

In early March, the rupee lost ground to find itself at 76 to the USD, which was its weakest since the middle of December 2021. “We now expect CPI inflation to average at 5.1 per cent in FY22-23 compared with 4.5 per cent previously”, said Rahul Bajoria of Barclays. When reports came in that Russia had targeted a nuclear plant in Ukraine, most currencies and stocks in emerging Asia slumped.


Oil and other commodities were getting more expensive in June, and by the middle of June, $24 billion had been withdrawn from Indian stocks for the year so far. The rupee held at 78.2825 to the USD on the forex trading floor. In the following weeks, the sell-off of Indian equities continued as risk found itself even more out of fashion. As a result, the rupee fell below the level of 80 to the dollar in July, and the impact of this was felt in corporate earnings, especially in sectors founded on imported materials, like steel, electronics and motor vehicles. Otherwise, the effects were felt in grocery store prices and international trade.


India clocked up a monthly import bill of $60 billion, and exports would probably be unable to compensate because global growth was not vigorous. Also, Indian exporters found it hard to benefit from the sliding rupee, for the reason that it was not the only currency in the world heading groundward.

If elevated energy prices kept raising import costs, the account deficit was in danger of widening even further. “If oil remains at $100, we project a current account deficit of 3.7 per cent of GDP in the next twelve months”, remarked the Institute of International Finance. “It will be among the widest in emerging markets”, they added.

The Reserve Bank of India (RBI) had already hiked interest rates by 90 bp for the year, but the pressure to hike had not abated. In the effort to keep their currency afloat, they had spent all but $580 billion of their foreign exchange reserves. Analysts believed inflation could be tamed, but only “if the RBI presses ahead with rate tightening instead of easing efforts on the back of falling commodity prices”, in the words of Pranjul Bhandari of HSBC.

August, September

The Fed hiked its own rates for the third consecutive time and indicated more was to come, holding back the rupee even more, as inflation got worse. The Governor of the RBI, Shaktikanta Das, said in August that the central bank would do “whatever it takes” to slow down inflation. Even though the RBI had spent tens of billions of dollars so far in the year to support the rupee, the currency had lost as much as 10 per cent by September. One force working against the central bank, in this regard, was the enlivened domestic economy after the lifting of pandemic restrictions.


The IMF (International Monetary Fund) saw “significant headwinds” for Indian growth and adjusted their forecast down to 6.8 per cent for the year. Finance minister Nirmala Sitharaman insisted, however, that the economy was essentially on strong footing and that inflation was at a 'manageable level', with the official aim to pull it below six per cent.

Despite the late beating taken by the rupee at the hands of the USD, the minister suggested that “The Indian rupee has performed much better than many other emerging market currencies” in the year. She also said the rupee would be able to endure the dollar’s upward trajectory, and that the economy would grow by seven per cent in the financial year ending in March 2023.


Mid-month, Brent crude oil futures lost more than three per cent overnight, bringing them below $90 a barrel. Behind the scenes, a Covid outbreak in China was dampening demand expectations, and there were fears of the Fed’s continued hawkish path. The rupee did not reap the benefits of the price drop, however, because there was consistent demand for the US dollar within forex trading walls, from oil importers and other companies. “Any dips in USD/INR are being bought out this week”, commented Ritesh Agarwal of CTBC Bank.

When crude oil prices fall, it’s considered good news not only in India, but in most of Asia, which tends to import its oil needs. On November 17, the US dollar was worth 81.6650 rupees.


The weeks to follow were not kind to the rupee, which lost 2.3 per cent in the month preceding December 12, to find itself at 82.70 to the dollar. “The combination of global risk-off sentiment and reducing interest-rate differentials between India and the US” convinced Gaura Sen Gupta of IDFC First Bank that 2023 should see the rupee lose more ground to the USD. Gupta was referring to the fact that 12-month implied rupee yields, which reflect interest rate differentials with America, had fallen to their lowest level since 2009. This hampered the business of carry traders, who approach their forex trading by taking advantage of the difference between high-yielding and low-yielding currencies. The rupee grew less appealing to them and, therefore, demand for Indian currency fell.

Meanwhile, it was expected that the RBI would bring its rate-hiking project to an end in early 2023. As to the Fed, analysts thought they would reach the peak of their hiking schedule at about mid-year.

Moving Ahead

In the week ending January 20, the rupee recorded its second straight week in the green, adding on 0.25 per cent and settling at 81.12 to the dollar. “The rupee is expected to appreciate, but it may not go beyond 80.50-80.75 as the central bank could step in at these levels”, suggested Arnob Biswas of SMS Global Securities.

The main forex trading headwinds for the rupee going ahead, according to HDFC Bank Ltd., potentially include the Fed’s uncertain hiking path, recession worries, and the impact of China’s economic re-opening. Indian equities continued to sell off going into the new year, with $1.9 billion withdrawn in the first three weeks of 2023.

Economists say that the Indian government will borrow another $198 billion in the fiscal year ending in March 2024. Climbing interest rates have made it increasingly difficult for the government to repay its debt, which has more than doubled in the past four years due to all the financial relief it has sent to those of its citizens affected by the pandemic, as well as the extremely poor. “The government borrowed a lot in the last few years to have funds for the pandemic, which means the repayment burden will be quite elevated for several years”, explains Dhiraj Nim of ANZ.

"Finally, it remains to be seen how India will deal with the inflation-growth mix, which is likely to be tricky," in the words of HSBC Holdings.

— Deepak Jain is an independent content writer.

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