After ending 2022 as the worst-performing Asian currency with a fall of 11.30% to 82.73 a dollar, the rupee is expected to fight back and have an appreciating streak in the current year.

The Indian currency has had a relatively good run towards the second week of 2023. Closing at 81.58 per dollar on 11 January, the rupee has gained by 1.5% in the last three days on account of foreign investment inflows and shrinking of dollar demand from oil companies. It has, in fact, outperformed all its emerging market peers over the last couple of days, raising hopes that the year would be better amid a possible weakening dollar and a recession-hit Europe. 

According to several leading market participants, the rupee is expected to have an appreciating streak in 2023. “Notwithstanding the bleak global growth outlook, the foreign institutional investors (FIIs) may not stay away from emerging markets with the Fed slowing down the pace of interest rate hikes during the year. The inflow of dollars and the Reserve Bank of India’s (RBI) support are going to give the rupee an appreciating bias for 2023,” the treasury head of a leading public sector bank said.

The rupee will, however, have to ride through a turbulent weather in 2023 as India’s exports take a nosedive and current account deficit (CAD) widens. In September 2022 quarter, India’s CAD stood at a nine-year high of 4.4% of gross domestic product (GDP) compared to 2.2% in the preceding quarter. The trade deficit will continue to worry as the three biggest economies of Europe, the US and China slow down simultaneously. Asia could be better off and the Indian economy could see growth of around 6.5% while inflation could ease from its earlier high levels. 

“Don’t think that the dollar will strengthen but I think the US equities will fall as the Fed will not be able to wrestle inflation down. This is going to keep the pressure on the rupee but the RBI will prevent significant losses,” said Jamal Mecklai, currency expert and chief executive officer at Mecklai Financial Services.

For the dollar, 2022 was a stellar year as it strengthened amid higher interest rates while emerging market currencies, including the rupee, felt the pressure. The Fed hiked interest rates by 425 basis points in 2022 to fight rising inflation in the US. In this backdrop, the rupee sank to a new life low due to foreign fund outflows, geo-political worries following the war in Ukraine, de-globalisation, tighter monetary policy and widening trade deficit. One of the prime reasons was the broad-based strength of the greenback. The ICE dollar index registered the best year-on-year performance for the gauge since 2014.

“In the year gone by, foreigners have sold worth $16.6 billion in equities and $2.02 billion in debts. India’s trade balance widened to $23.9 billion in November after hitting a record of $30 billion in July 2022,” wrote Dilip Parmar, an analyst at HDFC Securities, in a research note.

Forex dealers are betting the rupee would appreciate to 81 per dollar and if it were to depreciate in 2023, they say it would not go much below Rs 83.  “The depreciating bias of the dollar will improve prospects for the rupee, which is expected to be range bound all through the year. At the 81 levels, the RBI will try to shore up its forex reserves by buying up dollars. If the rupee depreciates, the central bank will dig into its reserves to stem the loss,” said the treasury head of a South-based public sector bank.

Analysts at Standard Chartered Bank expect the rupee to be range-bound over a 12-month horizon. “Above-trend and ahead of peers’ economic growth, improving real yields, lower commodity prices, light foreign investor positioning in equity and bonds amid a bearish USD outlook are key factors supportive of the Indian rupee. However, deteriorating external accounts amid falling exports growth, receding forex reserves, lower policy rate differential with the US are likely to exert downward pressures on the rupee,” the bank said in its market report. 

There are different estimates on the range the rupee could trade between in 2023, with some stating that the second half of the year should be when the Indian currency starts appreciating against the dollar.

“We believe the rupee could trade between 79 and 84/USD in 2023.The first half of next year could be weak for the rupee. In the second half as the interest rate peak-out and inflation come back to a normal level, the rupee could start appreciating along with the other Asian currencies,” said Parmar.

According to some currency analysts, the dollar could be on a downward trend in 2023 as it is no longer a haven.

“The dollar might lose its shine in 2023 on a more downbeat note as the pace of Federal Reserve interest-rate hikes begins to slow amid signs that inflation risks are beginning to lessen. On trade-weighted dollar has been overvalued and is no longer a haven...For now, the trend is down in the dollar index, and all eyes will be on how the economic and market landscape plays out in early 2023,”Parmar said.