Rupee drops 3.5% against dollar in FY22; fares better than global peers

The rupee ended the financial year with a decline of 3.5% against the dollar as compared to 3.4% gain in the previous year. The domestic unit fared well despite global headwinds like interest rate hike by the US Federal Reserve and rising crude oil prices after the Russian invasion of Ukraine.

The rupee depreciated 6.27% in the financial year 2013-14 when investors pulled out of emerging markets after the US Fed under Ben Barnanke spoke of possible financial tightening and reducing large-scale asset purchases.

One reason for the rupee to have performed better is that the country’s macroeconomic parameters are much better than the taper tantrum period. The current account deficit is under control which was 2.7% during the Oct-Dec period of 2021-22; and most importantly foreign exchange reserves are in excess of $600 billion, as compared to $274 billion during the height of taper tantrum.

“Rupee opened the financial year at 73.42 after closing at 73.50 on 31/03/21 and showed movement from both sides as RBI kept accumulating $ in the first half of the year taking FX reserves to an all time high of $642 billion. In the first half of the year Rupee remained in a range of 72.30 to 74.91 as RBI kept accumulating the $ as flows in the form of FPI and FDI as well as corporate flows kept RBI busy from the buy side,” said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.

According to latest data, the country foreign exchange reserves were at $619 billion, which has increased by close to $200 billion in the last four years.  In March of 2018, foreign exchange reserves were at $424 billion.

In a recent interaction with business leaders, RBI governor Shaktikanta Das assured that the country is comfortably placed to deal with any challenges emanating from the geopolitical crisis with its high foreign exchange reserves.

“In the run-up to the current crisis, our current account deficit is very low. Secondly, our forex reserves are very high. Over the last three years, our forex reserves have gone up by almost $270 billion,” he said.

The foreign exchange reserves actually came to the rescue after the Russia-Ukraine war broke out in late February. The geo-political crisis turmoil put crude oil prices on fire which surged past $100/bbl for the first time since 2014. As a result, the rupee was under pressure and slipped to all time low of 76.97/$ on March 7.

The central bank stepped its intervention in the foreign exchange market by selling dollars. This helped the rupee to stage a strong recovery after hitting all time low. The currency was the worst performing Asian currency when the war broke out, but ended the Jan-March quarter with a modest depreciation of 1.9%

“It was truly a rollercoaster year for the USDINR pair,” said Amit Pabari, managing director, CR Forex, referring the Indian unit’s journey in the current financial year.

“It was seen trading in a range of 72.90 to 75.50 for most of the time until the announcement of policy tightening from the Fed in November and Russia Ukraine war and FIIs withdrawal of $21.5 billion triggered another round of rally towards the previous high of 76.95 levels. The overshooting inflation in the US and supportive growth gave an extra edge to the US DXY to jump from 89.50 last year in May to 99.30 this month. Fortunately, RBI used almost $5.5 billion in mid-March and came up with two Sell/Buy swaps worth $5 billion each. This helped the Rupee to take a breather towards 75.60,” Pabari said.

Foreign exchange reserves have dropped over $20 billion in the last six months after hitting a record high around $642 billion.

“RBI began selling dollars to absorb liquidity and did not allow higher dollar rupee prices to affect India's inflation which rose to 6.1% beyond RBIs patience level of 4-6%. The reserves moved down from a high of $ 642 to a low of $ 619 as on 18th March. The Ukraine War took oil prices beyond $ 100 to as high as $ 139 per barrel. However, the rupee weakened to 76.97 but was well managed by the RBI and they did not allow the rupee to weaken beyond 77,” Bhansali said.

Going ahead there could be few headwinds for the rupee, particularly if the crude oil prices stay high. India, which imports over 80% of its oil requirements, will see its current account deficit widening if crude oil prices remain high.

“The forward premiums are likely to squeeze down further as RBI will not be able to hike rates that easily and the Fed is on course to do at least 6 hikes this year. Overall, the downside for the USDINR pair remains limited upto 74.80 to 75.20 zone. Whereas, weaker fundamentals could take the pair higher towards 78 to 78.50 over the next 6 to 8 months,” Pabari said.