Covid resurgence may play spoilsport for the rupee in 2023, says Shinhan Bank's Sodhani

Kunal Sodhani, Vice President, Shinhan Bank

The recent re-emergence of Covid in China and fears of a spillover to other regions could weigh on the rupee in 2023, Kunal Sodhani, Vice President at South Korea-based Shinhan Bank (Global Trading Center, FX and Rates Treasury), said in an interview to Moneycontrol on December 30.

"China has been battling Covid infections very badly with cases going up. There is a fear that Covid infections could spread to other countries also,” Sodhani said. He thinks Covid-related fears may continue into the first quarter of 2023 as well.

In the past few weeks, China has been battling a new variant of the virus which has led government to reimpose fresh lockdowns and travels restrictions it had lifted earlier. China has detected new Omicron sub-variants BF.7 and BA.5.1.7, which are considered to be highly infectious.

There is a fear that the Covid infections could spill over to other geographies as well.

Also read: CPI inflation may ease to around 5.3% in FY24, says HDFC Bank's Swati Arora

RBI’s inflation battle 

Back home, the Reserve Bank of India (RBI) is still struggling with higher inflation despite raising interest rates by 2.25 percentage points since May. Sodhani said central banks will continue to face a conflict between controlling inflation or boosting growth next year. Recessionary pressures may prevail across major economies.

"Considering inflation levels moving lower but at the same time global concerns from Covid and Russia-Ukraine still prevailing, they may not let the central banks lose their guard against inflation easily," he said. Sodhani expects further rates hikes during the first quarter of 2023 from across global central banks and a 25 basis point (bps) rate hike by RBI.

Sodhani said the central bank’s fight with inflation, the ongoing Russia-Ukraine war, recessionary fears among major global economies and India's rising current account and fiscal deficit are among the factors that could pressure the rupee in 2023 .

While the Reserve Bank of India (RBI) may intervene in forex market, the central bank’s focus is likely to be limited to tackling volatility and not targeting any specific levels for the rupee, Sodhani said.

The rupee has depreciated close to 10 percent against the US dollar in 2022.

"USD-INR may face a strong support at 80.20 levels, only a break of it may open doors for 78.60 while 85.00 remains a resistance," Sodhani said.

The rupee has remained volatile through the year and the RBI has been intervening in the forex market in the last few months to defend it from depreciating sharply. During this course, the central bank has sold dollars heavily to support the rupee.

In the last few weeks, forex reserves have seen some inflows. As of December 16, India's forex reserves stood at $563.5 billion, per RBI data. Additional reserves were created in anticipation of any uncertainty in the coming future.

"India's FX reserves had made a high of $643 billion which had dropped to around $529 billion, taking into account FX intervention and initial revaluation. Currently, we continue to hold nine months of import cover," Sodhani said.

Also read: Rupee trade settlement gaining traction, expect real transactions to pick up: Das

International trade settlement in rupee

Sodhani said allowing rupee settlements in global trade will help India promote exports and facilitate trading with sanctioned countries.

"Rupee invoicing was previously allowed since surplus rupees could not be invested in rupee assets, and now they are which can help rupee in the long run. The step is to remove reliance on USD," he said.

The RBI on July 11, 2022 allowed  trade settlements of India with other countries in the rupee.

"In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR," RBI said in a press release.

Going ahead, India will have to move further to liberalise its capital account to allow free flow of capital across the border for greater reach, Sodhani said.