Indian rupee may sink to 82.50 on towering dollar, funding gap: IDFC

The Indian rupee could decline to 82.50 against the dollar by March, driven by the greenback's surge and the country's balance of payment deficit, IDFC First Bank said in a research note.

The rupee on Monday dropped to a record low of 81.5775 as the dollar index raced to its highest level since May 2002 and the British pound tumbled.

The dollar's rally accelerated after the U.S. Federal Reserve last week raised rates by another 75 basis points and forecast more large-sized hikes to control inflation.

"Looking ahead, we believe the dollar strength will endure," Gaura Sen Gupta, economist at IDFC First Bank, said.

"Given the strength of the U.S. economy, it's more likely that the Fed will need to increase interest rates to 4.6% and maintain it for the remainder of 2023."

The Fed rate is currently at 3%-3.25% and officials have forecast it will reach 4.4% by the end of this year.

Alongside dollar strength, an elevated balance of payment (BoP) deficit is has continued to weigh on the rupee.

Sen Gupta pointed out that India's current account deficit (CAD) is expected to widen to 3.5% of the GDP and possibly to 4% if exports weaken further.

Meanwhile, foreign portfolio flows are also expected to remain volatile, considering high Treasury yields and weak global risk sentiment.

The combination of wider current account deficit and portfolio outflows will result in BoP deficit of $63 billion in the current fiscal year assuming a CAD of 3.5% of GDP, Sen Gupta estimated.