Indian rupee on Tuesday hit a fresh record low against the dollar as foreign investors continued selling local equities and crude oil rose.
The rupee opened at 78.50 per dollar and touched a fresh record low of 78.68. At 10.40am, the home currency was trading at 78.65, down 0.4% from its previous close of 78.35.
Foreign investors so far this year have sold around $28 billion in equities and since October $32 billion has flown out.
"Capital flows, especially portfolio flows, would be dependent on global factors such as the pace of relative monetary policy tightening, global risk aversions, global growth divergences, etc. With global inflation concerns expected to persist, we believe that risk assets would underperform in FY23, implying lower EME flows, including flows to India. We thus consider a net outflow in FPI (foreign portfolio investor) segment in FY23," said Yes Securities in a note to investors.
"Even as we expect net FDI (foreign direct investment) and short-term trade credit to stay relatively healthy, net capital inflows are anticipated to drop by around $30 billion to $53.5-57.5 billion in FY23. For FY23, BoP is likely to be in the negative, leading to a pressure on the USD/INR to depreciate. The RBI had been using its FX reserves to even out the depreciation pressure. We see USD/INR depreciating to 79-79.50 level by March 2023," Yes Securities added.
Geopolitical uncertainty has taken a turn for the worse this year. Amongst other things, it has caused a major disruption to commodity markets. Although most commodity prices are past their peak or are on a downward trajectory, global oil prices have stuck above $100 bbl.
Oil prices are likely to remain volatile in FY23, vacillating between supply concerns and demand weakness in the months to come as the global monetary policy cycle triggers a growth slowdown. Oil markets continue into a backwardation mode, thereby highlighting the supply concerns and an expectation that oil prices could remain sticky at higher levels, analysts said.
Meanwhile, Emkay Research expects Reserve Bank of India's rupee intervention may backfire if it continues support for long term.
"... Allowing rupee to gently weaken over time is the right strategy, giving CAD (current account deficit) space to improve. Thus, we believe the RBI may eventually let the exchange rate adjust to new realities, albeit orderly, letting it act as a natural macro stabiliser to policy reaction functions," Ekmay Research added.