The Indian rupee ended 2022 as the worst-performing Asian currency, down 10.14%, its biggest annual decline since 2013, when the dollar surged on the US Federal Reserve’s aggressive monetary stance to curb inflation .
The rupee ended the year at 82.72 against the US currency, up from 74.33 at the end of 2021, while the dollar index headed for its biggest annual gain since 2015.
The rupee was also a victim of an oil price rally sparked by the Russia-Ukraine conflict, which pushed India’s current account deficit to a record high in absolute terms in the September quarter.
Heading into 2023, market participants believe the rupee would trade with an appreciation bias, finding relief from softening commodity prices and hoping that foreign investors will continue to buy Indian stocks.
“The Fed could keep rates higher for longer than expected and if the slowdown in developed economies turns into a prolonged recession, India’s exports could be hit hard, which are two key risks for the rupee,” said Raj Deepak Singh, head of the Derivatives Research at ICICI Securities.
Most traders and analysts expect the currency to range in a tight 81.50-83.50 range for the first quarter.
Equity inflows would be a key metric to watch for the rupee, including for overseas investors, analysts said.
Given several uncertainties up to 2023, such as Factors such as tight monetary conditions, a likely recession in some economies and ongoing geopolitical conflict have made it difficult to assess the direction of equity markets, they added.
“There will be a period of weakness in global equities… If we see a sell-off in Indian equities, I will be less bullish on the rupee,” said Christopher Wong, FX strategist at OCBC Bank.
Even if the rupee appreciates, it could still lag behind Asian peers and would not be a top pick in the emerging markets complex, said Wong, expecting the South Korean won and Thai baht to gain the most next year.