Rupee weakens nearly 10% by end of Samvat 2078 on global pressures

Reflecting global headwinds, especially the Russia-Ukraine war and aggressive tightening by the US Federal Reserve, the rupee depreciated by 9.95 per cent to close at Rs 82.69 to the dollar on October 21, 2022, marking the end of Samvat 2078.

The currency exhibited two-way movements during October 2021-March 2022, and, on average, depreciated.

It had traded with an appreciating bias between mid-October and mid-November last year. In the following months, it went down amid foreign investors taking out money, the strengthening dollar, a rise in crude oil prices, and escalating geopolitical tensions, touching a low of Rs 76.924 on March 7, 2022.

It reversed some of these losses in the subsequent days with the correction in crude oil prices and was at Rs 75.81 on March 31, 2022.

Volatility surpassed levels observed during the second wave of the pandemic. It, however, eased in the second half of March 2022, according to the Reserve Bank of India’s (RBI’s) Monetary Policy Report.

In FY23 it traded with a depreciating bias against the dollar in April-September 2022. Market interventions by the RBI contained volatility and ensured orderly movements of the rupee.

While being active in the foreign exchange market, the RBI has maintained it is guided by the objective of containing excess volatility in the foreign exchange market. It does not work with any specific level or band. The RBI announced several measures on July 6 to enhance capital inflows and ensure overall macroeconomic and financial stability.

During FY23 (up to September 27), the dollar appreciated by 16.1 per cent against a basket of major currencies. However, the rupee depreciated by a lower order of 6.8 per cent against the dollar, faring better than many peers in advanced economies and emerging markets.

The performance of the rupee, which weakened less than some other currencies, has been attributed to stronger macroeconomic fundamentals and buffers, such as India’s inflation being lower than the weighted average of its major trading partners, the RBI said in its Monetary Policy Report, September 2022.

Despite a drawdown, India’s foreign exchange reserves, at $528.36 billion (as on October 14, 2022), are robust in conjunction with net forward purchases, providing insulation from external shocks and resilience.

Soumyajit Niyogi, director, core analytical group, India Ratings, said: “The rupee has depreciated little compared to other emerging market economies. So trade benefits in competitive terms could be limited."

A weakening bias in the rupee continued in October with foreign portfolio investment outflows, pushing it above 82 levels. 

Bond yields hardening on tight monetary actions

The yield on benchmark bonds (10-year paper) moved up 120 basis points in Samvat 2078 to 7.51 per cent on October 21 due to changes in the monetary policy stance to contain inflation and hardening interest rates.

Starting with an out-of-cycle Monetary Policy Committee (MPC) meeting in May 2022, the RBI hiked the policy repo rate by 190 basis points to 5.90 per cent. 

During the second half of FY22, the 10-year G-sec yield hardened by 63 basis points, reflecting global and domestic factors. It rose by 24 bps during Q3FY22, driven by higher international crude prices, and increasing government bond yields in major economies.

In Q4FY22, the benchmark yield firmed up by a further 39 bps owing to higher-than-expected indicative calendar of market borrowing  and planned market borrowing by the Centre.

Moving to the new financial year, G-sec yields exhibited two-way movements during the first half of FY23.The generic 10-year yield rose by 64 bps during Q1FY23. In Q2 FY23 (up to September 27), the benchmark yield softened by 20 bps owing to a fall in crude oil prices, lower CPI inflation in July vis-à-vis June, the return of foreign portfolio investors as net buyers in August-September, and expectations of India’s likely inclusion in global bond indices.

In October, the yield on the 10-year government security climbed back above 7.4 per cent.