The Rupee (INR) is expected to remain stable in the short term and trade in the range of 82-83 per Dollar (USD) as it will find some support from improving balance of payments dynamics and stable oil prices, according to a report by Bank of Baroda’s economic research department.
The currency outlook report noted that Dollar rally resumed once again as bets of more Fed rate hikes reemerged.
Aditi Gupta, Economist, BoB, observed that investors are now expecting two more rate hikes, implying a terminal Fed fund rate above 5.1 per cent (Fed’s projection December 2022). This put pressure on all major global currencies.
“Tracking global cues, INR too depreciated by 1.1 per cent in February 2023, reversing the gains it made at the start of the year ... Interestingly, India’s trade deficit fell to a 12-month in January 2023 as imports declined more sharply than exports.”
“On the other hand, services exports remained buoyant. FPI flows though negative, may also end FY23 on a positive note which will further support INR,” Gupta said.
She opined that apart from a strong dollar, weakness in domestic equity markets as well as FPI outflows can explain the weakness in INR in February 2023.
However, relative to other currencies, INR has fared better. While the median depreciation in the sample of 19 currencies was 1.6 per cent, INR depreciated by only 1.1 per cent.
Furthermore, it has also performed better when compared to other emerging markets as well as currencies of many advanced economies.
“While INR has come under pressure in the last few sessions, we believe that this may prove to be temporary. A number of factors support this view,” Gupta said.
The BoB Economist noted that unlike last year, the probability of any runaway appreciation in the dollar remain low. Despite the announcement of production cuts by Russia, oil prices remain benign, which will support INR.
While FPI flows have remained negative this year, there may be some revival especially in the debt segment, she said.
Further, India’s external deficits are likely to find comfort from easing commodity prices and a slowdown in domestic demand
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