Rupee weakens 7.8% against US dollar in FY23, most in three years

Most major currencies witnessed high volatility in the financial year 2022-23 due to geopolitical factors, such as the Russia-Ukraine war, and the sharp increase in the interest rate by the US Federal Reserve. The rupee did not remain untouched and depreciated 7.8 per cent in the outgoing financial year -- the most since 2019-20.

This was the second time since the currency crisis of 2013-14 when the domestic currency weakened around 8 per cent versus the greenback. Still, it has fared better than many other currencies, such as the Chinese renminbi, South Korean won, Malaysian ringgit, and Philippine peso.

The rupee closed FY23 at 82.18 to a dollar, against 75.79 a year ago.

“USD/INR has witnessed some high drama and volatility during FY23 due to global geopolitics and Fed rate hikes. We expect FY24 to be less volatile as central banks slowly end their rate-hiking campaign and move towards lowering rates. We move from a year of policy divergence to policy convergence,” Anindya Banerjee, V-P-currency derivatives & interest rate derivatives, Kotak Securities.

The Reserve Bank of India (RBI) stepped up its intervention in the foreign exchange market to curb the volatility. Foreign exchange reserves -- which was $606 billion as on 1 April 2022 -- fell to $525 billion in the week ended October 21. Reserves increased since then to hit $579 billion on March 24, 2023.

“The rupee remained bearish for 2022-23, taking cues from the Ukraine-Russia war, stretched twin deficits, sticky inflation, and inflated oil prices. Headwinds saw the rupee navigating to an all-time low level of 83.29. Fed resorting to rate hikes to quash inflation also saw the rupee turning sluggish, elevating the bids for the American currency. Adding to the woes of the rupee was the exodus of funds by FIIs,” said Ritesh Bhansali, vice-president, Mecklai Financial Services.

Though the US Fed may hike interest rates further, the market is expecting it to be nearing its peak in this rate hike cycle. Once the rate cycle is over, the pressure on the Indian currency may ease. The rupee has gained 0.7 per cent against the dollar in the first three months of 2023.

“FY24 promises to be a much different year for USD/INR from the current account dynamics standpoint,” Abhishek Goenka, CEO, IFA Global. India’s current account deficit declined to $18.2 billion (2.2 per cent of GDP) in the October-December of 2022, from $30.9 billion (3.7 per cent of GDP) in the previous quarter and $22.2 billion (2.7 per cent of GDP) a year ago.

“Stepping into FY24, the CAD is a lot more benign. Procurement of discounted crude from Russia is a big positive. The trade deficit has been below $20 billion for two months now and the services sector surplus has been surprising on the upside. Even if service exports slow down due to imminent slowdown in the West, we still could see CAD at a comfortable 1.5 per cent of GDP,” Goenka said.

Bhansali said going ahead, the rupee will be taking cues from dollar movements even as the possibility of a recession lingers on. “The direction that the oil prices will adopt will provide a further astute picture of how the rupee would shape itself in the year to come. Twin deficit is expected to cool off while the slowdown of inflation on the back of high base effect will also play a noteworthy role in swaying the movement in the local unit,” Bhansali added.