Economy

Published: Apr 1, 2023
Updated: Apr 1, 2023

India's Rupee Weakens Against US Dollar in FY23: A Look at the Factors

The Indian Rupee weakened by 7.8% against the US dollar in the financial year 2022-23, marking the most significant depreciation in three years. The currency closed at 82.18 to a dollar, compared to 75.79 a year ago. The rupee's depreciation was a result of the geopolitical factors and the US Federal Reserve's interest rate hike, leading to high volatility in most major currencies.

Rupee's Performance Compared to Other Currenciesmy

Despite the depreciation, the rupee fared better than other currencies like the Chinese Renminbi, South Korean Won, Malaysian Ringgit, and Philippine Peso.

Central Banks' Rate-Hiking Campaign to be Tapered

Kotak Securities expects financial year 2023-24 to be less volatile as central banks move towards tapering their rate-hiking campaign. Anindya Banerjee, V-P of Currency Derivatives and Interest Rate Derivatives at Kotak Securities, expects the transition from policy divergence to policy convergence to ease the pressure on the Indian currency.

Reserve Bank of India's Intervention

To curb volatility, the Reserve Bank of India increased its intervention in the foreign exchange market. However, foreign exchange reserves decreased from $606 billion on 1st April 2022 to $525 billion on 21st October 2022. The reserves increased again and reached $579 billion on 24th March 2023.

Factors Contributing to Rupee's Depreciation

Ritesh Bhansali, vice-president of Mecklai Financial Services, attributes the rupee's depreciation to geopolitical factors, such as the Russia-Ukraine war, stretched twin deficits, sticky inflation, and inflated oil prices. Additionally, the Fed's rate hikes to quash inflation led to the rupee turning sluggish, with bids for the American currency increasing. The exodus of funds by Foreign Institutional Investors (FIIs) also added to the rupee's woes.

Expectations for the Future

Although the US Fed may hike interest rates further, the market expects it to be nearing the peak of its rate hike cycle. Once the rate cycle ends, the pressure on the Indian currency may ease. The rupee has already gained 0.7% against the dollar in the first three months of 2023.

Abhishek Goenka, CEO of IFA Global, expects India's current account deficit (CAD) to be a lot more benign in the financial year 2023-24. The CAD declined to $18.2 billion (2.2% of GDP) in October-December 2022, from $30.9 billion (3.7% of GDP) in the previous quarter and $22.2 billion (2.7% of GDP) a year ago. The procurement of discounted crude from Russia and a trade deficit below $20 billion for two months are positive factors that may contribute to a comfortable CAD of 1.5% of GDP, even if service exports slow down due to an imminent slowdown in the West.

Geopolitical factors flare the weakening of Rupee against Dollar

The rupee's performance in the financial year 2022-23 was affected by geopolitical factors and the US Federal Reserve's interest rate hike. However, the current account deficit, which declined in October-December 2022, and the possibility of the US Fed nearing the peak of its rate hike cycle may ease the pressure on the Indian currency.