Rupee likely to trade in a narrow range against the dollar for the rest of 2022, says DBS Bank’s Radhika Rao

The Indian rupee is likely to range between 81 and 82.30 against the dollar for the remainder of 2022 amid weakness in the greenback and the possibility of a less hawkish US Federal Reserve, DBS Bank Senior Economist Radhika Rao told Moneycontrol.

“A consolidative tone for the currency is more likely in the near-term as Fed speakers are likely to remind markets that (while) the rate hike cycle still has more legs, the quantum of increases is less aggressive,” Rao said in an email interview.

The rupee was to range between Rs 81 and 82.30 to a dollar in October-December, according to the DBS forex strategist forecast, and the price action “has played out along expectations,” added Rao.

The rupee has depreciated 8 percent against the dollar, so far, in 2022, compared with a 10.36 percent and 9.85 percent decline in regional peers like the Chinese yuan and the Korean won, respectively, according to Bloomberg data.

The dollar index has risen by 11.3 percent in the same period. On October 20, the rupee hit a record low of 83.29 against the dollar and is currently trading at 81.6125.

The Indian currency came under pressure after Russia’s invasion of Ukraine in February sent commodity and energy prices soaring and distorted supply chains globally, leading to heightened inflationary pressure.

Subsequently, aggressive policy tightening by the Fed to combat inflation strengthened the appeal of the US dollar and prompted investors to shun risky assets in emerging markets.

The US central bank has raised the Fed Funds rate by 75 basis points (bps) each in the last four meetings to quell accelerating inflation and is likely to hike by another 50 bps in December. One basis point equals one-hundredth of a percentage point.

Also read: Rupee weakening may not be over yet, say experts

‘Incremental rupee depreciation capped’ 

After the aggressive policy hikes by the Fed, US inflation has shown indications of cooling off. The Consumer Price Index (CPI) in the US jumped 7.7 percent in October relative to a year earlier — the smallest 12-month increase since January.

The data has prompted traders to calibrate again the pace of Fed rate hikes. On September 27, the dollar index hit a high of 114.106; it has dropped 6.7 percent since then.

Rao said regional currencies, including the rupee, have benefited from a retreat in the dollar following the softer-than-expected US CPI inflation print, which is likely to trigger a Fed debate on slowing the pace of rate hikes.

This has capped incremental depreciation pressure on the rupee, with the year-to-date movement having seen the unit maintain its position in the middle of the Asia (excluding Japan) forex performance ladder, she added.

A pullback in commodity prices also limited further deterioration in India’s merchandise trade balance, she said, adding that the services surplus also provides an “additional cushion.”

India's merchandise trade deficit widened to $26.91 billion in October as exports fell by 17 percent year-on-year to $29.78 billion while imports rose by 6 percent, data released by the commerce ministry on November 15 showed.

While India continued to suffer on the merchandise front, trade in services prospered. In October. The surplus from trade in services was 41 percent higher compared to the same month last year, coming in at $12.28 billion.

Also read: MC Explains | India’s current account deficit conundrum

Drop in domestic inflation likely

Like in the US, India’s retail inflation saw a decline last month. Retail inflation measured by the Consumer Price Index declined to 6.77 percent in October, the lowest in three months, from 7.41 percent in September.

Rao said that inflation is likely to “gradually decelerate” over the rest of the fiscal year.

“Signs of a peak in inflation, and lower incremental depreciation pressures on the currency, increase the likelihood that the RBI might dial down the scale of the hike in December to 35 bps, after three consecutive 50 bps increases, and the tightening cycle to peak in early 2023, ahead of the US Fed,” said Rao.

The rate-setting Monetary Policy Committee (MPC) has already hiked the policy repo rate, or the rate at which the Reserve Bank of India (RBI) lends funds to banks, by 190 bps since May to quell inflationary pressures. The panel is scheduled to meet on December 5-7.

The policy communication and the views of the policy committee members will be closely watched, said Rao.

Forex reserve accumulation 

Now that large rupee depreciation risks have waned, the RBI is likely to prioritise restoring its forex reserves as flows are expected to resume, said Rao.

“Stabilisation in the reserve currencies should also help prevent further valuation losses on the existing stock,” Rao added.

India’s foreign exchange reserves hit a record high of $642.45 billion on September 3, 2021, according to data from the RBI. In April, forex reserves fell below $600 billion and currently stand at $530 billion.

RBI Governor Shaktikanta Das has defended the Indian central bank's intervention in the foreign exchange market, saying forex reserves were "very comfortable”.