Why is the rupee weakening again and what’s the outlook for the currency?

by 5paisa Research Team Last Updated: Dec 12, 2022 - 11:27 am 42.4k Views

To say that the Indian rupee has had a roller-coaster ride over the last couple of years, would be an understatement, by a mile. 

From being one of the worst-performing currencies in Asia in 2020, in the wake of the economic slowdown induced by the coronavirus lockdown, the rupee rebounded in May this year, to become one of the best performing. 

And now it appears, the Indian rupee is set to end the year as Asia’s worst performing currency, according to a Bloomberg report. 

How much has the currency slumped over the last few months? And why is this decline happening?

The currency declined 2.2% this quarter as global funds pulled $4 billion of capital out of the country’s stock market, the most among regional markets where data is available, said the report.

But why are foreign investors selling their holdings in Indian markets?

Foreigners sold Indian stocks as Goldman Sachs Group Inc. and Nomura Holdings Inc. recently lowered their outlook for equities, citing lofty valuations, at a time when concerns about the omicron virus variant are roiling the global markets. Record-high trade deficit and the Reserve Bank of India’s policy divergence with the US Federal Reserve have also impinged on the rupee’s carry appeal.

Is the decline in the value of the rupee all bad news?

Not really. A decline in the value of the Indian rupee does make exports from the country cheaper. This, in turn, would help cushion the impact of the economic slowdown, especially since domestic demand too has declined. 

Having said that, since India remains an import-dependent country—especially when it comes to energy as well as electronic equipment—a weaker rupee would mean costlier imports and could potentially skew the country’s balance of payments. In fact, India’s trade deficit widened to an all-time high of about $23 billion in November amid higher imports. 

So, to that extent, it is a mixed bag of sorts, and the RBI would have to tread cautiously. 

How much could the rupee decline further?

Citing QuantArt Market Solutions, the Bloomberg analysis says the rupee could decline to 78 per dollar by end-March, falling past the previous record low of 76.9088 reached in April 2020.

Another survey of traders and analysts by Bloomberg forecasts the rupee at 76.50. The rupee is set to drop about 4% this year in a fourth straight year of losses, the report noted.

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