By Amit Pabari

What sort of an interesting, challenging, roller coaster ride of a fiscal 21-22 for Rupee it was. For the year, the rupee ended down 3.5% as negative factors outweighed a few positive factors. He was lucky though as the RBI saved him 1.5% by selling a few yards of dollars and announcing sell/buy swaps.

Flashback to the 2021-22 financial year:

The fundamentals have been divided only into two parts. During the first half of the financial year (April to September), the rupee was between 72.30 and 75.60. Fundamentals were in favor of the rupiah as growth accelerated, FIIs rolled out nearly $5.35 billion and equities saw lifetime highs. But the supply bottlenecks did not resolve, and so the United States began to face decades-long high inflation. It took several months for the Fed to understand that inflation was not transitory and that it had to lift its support as soon as possible. Finally, the second half of the year was a turning point for the US Fed, global markets and the rupee as well. In October, the Fed accepted that inflation could persist for an extended period and for that it will have to reduce its QE (bond buying program) from November to March. And with that, emerging markets started to face an equity market exit, FIIs withdrew about $21 billion from the Indian market in the second half of FY22. .

Clearly, rising US rates and yields did not favor riskier emerging markets and currencies. The US DXY was steadily advancing on rate hike prospects. Black Gold – Crude oil was rising due to growing demand and unresolved supply bottlenecks.

In mid-February, the birth of the Russian-Ukrainian war added “oil to the fire” and “oil to the oil” as well. In the energy package, Russia accounts for 11% of crude oil production and 17% of natural gas production. They are not only a big supplier in the global oil and gas market, but also in many other commodities. They also have a strong command of agricultural and fertilizer production. Reacting to the global turmoil due to risk aversion sentiment, the rupiah depreciated to an all-time low of 76.95. But didn’t hold out for long as RBI suspended the intervention and saved him from the slide. They sold about $13 billion from reserves and announced a couple of sell/buy swaps worth $5 billion each. With that, the rupee rallied nearly 1.6% and still closed FY22 down 3.54%.

Among the EM pack, Rupee mostly sits in the middle of the performance list. The rupiah depreciated by more than 3.30% compared to the average performance of emerging markets. The Brazilian Real was an outlier with an impressive 19% return as rising commodity prices supported the net exporting country.

Outlook for FY22-23:

Surely, a new financial year will also have many interesting themes to watch. Let’s check the factors that are likely to go against and in favor of the rupee.

The factors against the rupee this year would be:

Higher inflation: Fuel and food prices represent nearly 53% of the weight in CPI inflation. India’s inflation for the month of February came in at 6.1%, surpassing the upper limit of the RBI’s comfort zone (6%) even before the fuel price hike took effect in India . The wave of hiking has started as the country experiences its 12th hike in 14 days after there was no change in prices for four months since November, taking the total hike to Rs 8.40 per litre. Retail sales of food products, grains and pulses are also soaring and therefore pushing inflation to remain high at around 7 or 8%. Overall, for the year, we could see a new normal double-digit inflation in India.

Record trade deficit and current account deficit: According to the latest data, India’s current account in the three months to December 2021 widened sharply to a deficit of $23 billion, or 2.7% of GDP. Although India has met its $400 billion export target, the widening trade deficit to a record high is likely to remain a major concern.

Another budget deficit close to the record: The budget deficit for the April-February period stood at Rs 13.16 lakh crore or 82.7% of the revised estimate of 6.9%. For the second consecutive year, the government should respect its fiscal budget. The government will borrow 8.45 trillion rupees in April-September FY23, on the record borrowing plan of 14.31 trillion rupees. This explosive fiscal target of 6.4% could be a headwind for the rupiah.

Fed Hawk: The majority of FOMC members recently indicated a 50 basis point hike with a 73% probability of the same. For the year, the market expects increases of 6 basis points per quarter. The 2-10 year yield has already reversed to discount everything like today. The DXY is poised to break above 100 due to both the hawkish Fed and risky demand.

Uncertainty about the Russia-Ukraine war: Even after a month, things are not getting better on both sides. Russia and Ukraine are not giving up and so this has an impact on all financial markets. The United States and other Western allies are increasing their sanctions day by day. Thus, risk aversion sentiment is likely to persist and riskier emerging markets to be on edge.

The factors in favor of the rupee would be:

RBI Reserves and the Sell/Buy Swap: As we saw in March, RBI could use its various shashtras to ease the pressure. Thus, there would be more selling and sell/buy swap announcements to control the value and volatility of the rupee.

India’s Largest IPO-LIC and Other Corporate Borrowing Streams: The most anticipated IPO has been delayed due to sudden market sentiment, but is expected to be announced soon and could lead to strong dollar inflows. That aside, many companies have filed for IPOs with SEBI and are likely to strike in early FY23. Corporate borrowing flows could also support the value of the rupee.

Outlook

Another financial year remains attractive for the Rupee as domestic and global factors remain fragile and gloomy. Admittedly, volatility should remain elevated, as flows continually back and forth from emerging markets into emerging markets or US Treasuries. The DXY should remain stronger after the multiple Fed hikes. The commodity market is surely under its bullish run and will add further fuel to the ongoing inflationary wave. Higher prices create a headwind in front of net importing countries such as India. The increase in debts due to the increase in imports and exports remains uncertain due to the disruption of supply. Overall, USDINR is expected to steadily depreciate towards 77-77.50 over the next 2-4 months and 78.50 over 6 months. On the downside, support for the pair is around the 75.50-75.20 levels and further at the 74.80 levels.

(Amit Pabari is the Managing Director of CR Forex Advisors. Opinions expressed are those of the author.)