Achhe din for rupee? Domestic currency may fall below 80 against dollar in coming months, say analysts
Rupee outlook: Analysts are largely positive about the rupee value. While they believe there may be some intermittent volatility in the US dollar and Indian rupee (USDINR) pair according to the economic indicators, the overall outlook is positive.
PremiumRupee is one of the best-performing Asian currencies in the year 2023 so far. Year-to-date, the domestic currency is up about a per cent against the dollar thanks to India's healthy macroeconomic indicators, positive interest rate differentials, stable inflation, and foreign investment inflows.
Analysts believe that the domestic currency may remain resilient in the medium term because of the fall in crude oil prices, easing of the dollar index amid expectations of a pause in rate hikes, India's narrowing current account deficit (CAD) and foreign capital inflows.
Rupee fell to record low levels against the dollar in 2022 but the new year has seen the currency gaining strength. Data show that while the currency has gained about a per cent against the dollar, the Japanese yen and Chinese yuan have slipped further against the US currency. On the other hand, British Pound and the European currency euro are among the biggest gainers against the dollar this year so far.
The road ahead for the rupee
Most analysts are positive about the medium-term prospects of the dollar. However, there may be some intermittent volatility in the US dollar and Indian rupee (USDINR) pair according to the economic indicators.
Read more: International trade in rupee currency soon, says Piyush Goyal
Raj Deepak Singh, Analyst – Currency, Commodity, and Derivatives at ICICI direct expects the rupee to appreciate towards 80.50 levels in the medium term. He believes the rupee may move even below 80 against the dollar in the coming months. Singh said the rupee is likely to face a hurdle near 83 on the higher side, which has been a strong resistance for the past six months.
"The rupee may appreciate in the medium term amid expectation of further weakness in the dollar. Furthermore, softening crude oil prices may be supportive of the domestic currency as it will reduce import bills. Additionally, India's CAD has narrowed to 2.2 per cent of GDP in the quarter ending December from 4.4 per cent of GDP in Q2FY23 and is likely to narrow further amid growth in service exports. Indian economy, too, is exhibiting resilience to external headwinds and is forecast to be in better shape compared to emerging countries," Singh observed.
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Singh pointed out that the dollar is losing its steam and is likely to slip further to 100 levels on anticipation that this would be the last rate hike and Fed to hit a pause button for a while, particularly due to lingering concerns over economic growth and a renewed banking crisis.
"Dollar index after making a high of 105.88 in March 2023 again started losing its steam and slipped back near 101 levels. The dollar index is facing strong resistance near 103. As long as it sustains below this level, the downtrend may remain intact. We expect the dollar index to eventually move towards psychological levels of 100," said Singh.
On the other hand, Anindya Banerjee, VP of currency Derivatives & Interest Rate Derivatives at Kotak Securities is of the view that over the medium term, the path of the rupee will be dictated by the trend of the dollar against global currencies.
Read more: Asian Development Bank may consider rupee-denominated bonds
Banerjee underscored that in the current year till date, the Indian rupee has been a marginal outperformer when compared with its peers of 25 major currencies. However, when compared in terms of volatility, the rupee has been a major outperformer, thanks to capital inflows and aggressive intervention from the RBI on both sides of the market.
"The US dollar index has depreciated by nearly 12 per cent since the peak in October. The path forward for the dollar could be a mix of both, up and then down," said Banerjee.
The dollar tends to do well when either a relatively strong US economy compels the Fed to hike rates at a faster pace than its peers or when there is a flight to safety due to global financial market turmoil.
"Over the next few months, there is a risk of the US economy slowing down and the stress in the banking sector increasing. That can lead to risk-off in the financial markets, which could drive the dollar slightly higher. USDINR pair can scale 82.50/83.00 region. But once the Fed pivots towards rate cuts to support its economy, we could see the rupee appreciate strongly, taking USDINR towards 80 levels. Hence, we could see a zig-zag move in USDINR, with an up move followed by a down move," said Banerjee.
Rupee opens marginally higher at 81.95 against US dollar
S. K. Hozefa, CEO of Tradeplus Online underscored while the weakening of the US dollar, foreign fund inflows, healthy domestic economic data and lower crude oil prices have supported the rupee this year so far, it is important to understand that the domestic currency's performance may be tempered by the actions of the Reserve Bank of India (RBI).
"The central bank has been accumulating dollars to boost its foreign exchange reserves. The increased reserves suggest that the RBI has been buying dollars, which can limit the upside potential for the rupee," said Hozefa.
"The sustainability of the rupee's performance will depend on various factors such as global market conditions, economic data, and monetary policies. Increased volatility is welcomed, but the trend's durability is crucial. The upcoming US inflation reports and market expectations for rate changes will also influence the rupee's outlook," Hozefa said.
Shrey Jain, founder and CEO of SAS Online believes the medium-term outlook for the rupee is favourable, assuming continued economic growth and stable investor confidence.
"The rupee's rise can positively impact domestic market sentiment by reducing import costs and attracting foreign investment. However, it may also pose challenges to export competitiveness and foreign remittances," said Jain.
Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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