The rupee’s fall may not be over despite some gains in the past few days, as India is still fighting with a higher trade deficit and inflation, forex dealers said.
Apart from the domestic concern over the deficit, geopolitical uncertainty and global growth worries could put pressure on the currency, they said.
“The respite from the US inflation print has brought some gains in the rupee. But it is premature to conclude that depreciation risks have subsided. The US Fed remains data dependent and is not at the end of its rate hiking cycle. Any unpleasant surprises on economic data could tip the scales in favour of the dollar again,” said Sakshi Gupta, economist at HDFC Bank.
Moreover, geopolitical tensions continue to linger along with looming recessionary risks (especially in the EU), which could fuel a safe haven bid for the dollar. Financial tightening continues and could lead to volatility and risk-off episodes.
Since the start of this month, the rupee has gained over 1% and sometimes traded at 80.80 levels against the dollar. The rupee began the month at 82.60 and the second week had gone below the 81 mark. At 12:55 pm today, the Indian unit was trading at 81.36 against the dollar.
Where will the rupee settle?
Dealers said that the rupee is expected to find some stability close to the 81-82 level over the medium term due to its positive growth differential.
“We expect USDINR 80.40 to 83.00 from 81.50 to 83.90 earlier,” said Dilip Parmar, Research Analyst, HDFC Securities.
Gupta added that the rupee is likely to remain range bound between 80.50 and 82.00 in the near-term and is expected to consolidate between the 81-82 range in H1 2023 as the Fed comes to the end of its rate hiking cycle.
In addition, oil prices are expected to gravitate towards $80-85 per barrel in 2023 due to the global demand slowdown, providing some support to the rupee.
What will the RBI do?
Forex dealers said that any sharp depreciation in the rupee will be supported by the Reserve Bank of India (RBI), as was the case over the past few months. “Moves below 81 on the rupee are likely to see dollar buying by the RBI to shore up its reserves in the near term,” Gupta said.
On a year-on-year basis, India’s forex kitty declined nearly $110 billion from October’s $642 billion to $530 billion, per the latest RBI weekly statistics.
The central bank has seen intervening heavily in the forex market to keep the rupee from a sharp fall.
As observed in the past three sessions, the RBI has been a buyer of dollars, which will hold domestic dollar demand in place and likely keep the near-term bottom of 80.80 protected. Any bounceback towards 81.50-82.00 can be taken as a selling opportunity as the overall trend in the DXY (dollar index) seems to have changed post a crucial 109.50 level breakdown, Amit Pabari, MD, CR Forex Advisors said in a note.
Further, the Chinese Yuan and Japanese Yen, Asian peers closely followed by the Rupee, have strengthened sharply. Also, foreign inflows have resumed, bringing about $3 billion to the country.
“Going ahead, as foreign funds turn net buyers and globally the dollar index starts retracing, the RBI may take the recent decline as an opportunity to rebuild reserves and import covers,” Parmar added.
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