Depreciation speculations of Indian rupee waver in new year despite 11 pct fall against USD in 2022

MUMBAI, Jan. 10 (Xinhua) -- Indian rupee is currently above 82.12 against the U.S. dollar.

The new year saw the Indian rupee shrugging bearish domestic value and gaining against the U.S. dollar.

However, last year the Indian rupee fared the worst at its nine-year low.

The Indian rupee ended 2022 as one of the worst-performing Asian currencies with a fall of 11.3 percent, its biggest annual decline since 2013, as the dollar soared on the U.S. federal reserve's aggressive monetary policy stance to check inflation.

INDIAN RUPEE PERFORMANCE

The value of the Indian rupee against the U.S. dollar has steadily declined over the past few years.

The Indian rupee finished 2022 at 82.72 to the U.S. dollar, down from 74.33 at the end of 2021.

Currency depreciation is a fall in the value of a currency in a floating exchange rate system and the rupee depreciation means that the Indian currency has become less valuable with respect to the U.S. dollar.

India's central banking institution, the Reserve Bank of India (RBI), has burnt forex reserves at a dramatic pace in 2022.

The move was prompted to prevent exchange rate volatility, an intervention that many in the market believed was to defend the currency at a particular level.

As the RBI sold dollars to arrest the fall of the Indian rupee, India's forex reserves depleted the most among all emerging economies.

Data released by the RBI showed India's foreign exchange reserves fell by 70.8 billion dollars in 2022.

The forex reserves rose 44 million dollars in the week ended December 30, 2022, to 562.9 billion dollars, data showed.

In fiscal year 2023, forex reserves have declined by 44.5 billion dollars whereas for the whole of 2022, reserves are lower by 70.8 billion dollars.

During the week reserves rose marginally, led largely by an increase in the gold reserves by 354 million dollars to 41.3 billion dollars. On the other hand, foreign currency assets fell 302 million dollars to end 2022 at 498.2 billion dollars.

CAUSES THAT TRIGGERED RUPEE FALL

The decline of the Indian rupee against the greenback was mainly attributed to the appreciation in the U.S. currency on safe haven appeal amid fears of inflation across many parts of the world and the Russia-Ukraine conflict.

The outbreak of the Russia-Ukraine conflict in February 2022 disrupted the global supply chains, thereby fuelling inflation as well as inflationary expectations across the world.

Financial experts argued that as inflation rose across the world and domestic growth slowed, investors usually looked to sell their domestic assets and put the money into the U.S. markets for better safety and returns.

The move increased the value of the U.S. dollar worldwide.

On Oct. 20, 2022, the rupee fell to a lifetime low of 83.29 against the U.S. dollar, the U.S. financial news outlet Bloomberg reported.

However, the RBI heavily intervened in the forex market to defend the rupee and the imported inflation became a challenge for policymakers.

Another reason for the Indian rupee to fall against the U.S. dollar was the growing trade deficit -- imports increased at a much higher pace than exports.

A weaker rupee has made imports more expensive and thus left a short-term negative effect on domestic production and gross domestic product as a whole.

The increase in imports resulted from a sharp surge in oil prices following the Ukraine crisis. High crude oil prices in the international market too weighed on the rupee.

Reports said foreign investors pulled out a net sum of 1.21 trillion Indian rupees (14.7 billion dollars) from the Indian equity markets and over 166.8 billion Indian rupees (2.02 billion dollars) from the debt markets in 2022 owing to an aggressive rate hike by central banks globally.

RUPEE OUTLOOK FOR 2023

Forex analysts say the outlook on the Indian rupee remains weak in 2023 but its depreciation may not continue for a longer period.

"Major currencies in 2022 have fallen by an average of over 10 percent including the rupee. But volatility for the rupee has been curtailed by active intervention by the RBI," Navneet Damani, senior vice president of currency and commodity at Motilal Oswal Financial Services Limited, was quoted in local media as having said.

However, Neeraj Gambhir, group executive for treasury, markets and wholesale banking at Axis Bank Limited, said the Indian rupee is likely to extend losses in the next fiscal year, but he does not expect any runaway depreciation, with a milder 2 percent to 3 percent drop in the fiscal year starting April 1.

"The RBI has used up a fairly large amount of reserves through last year to manage the pace of depreciation," said Gambhir. "If there is a flow back of liquidity into domestic markets, that would be used to build back those reserves."

RBI Governor Shaktikanta Das said in a December 2022 monetary policy announcement that when the tightening is over, the tide will surely turn and capital flows to India will improve leading to the easing of external financing conditions.

"The terminal interest rate for the U.S. Fed is anybody's guess, but it cannot be the case that their monetary policy will be tightened endlessly," he said.