The year 2022 proved to be a challenging time for the Indian rupee, marking its worst performance since 2013. While the depreciation in 2013 was attributed to both global (taper tantrum) and domestic factors (high inflation), this time around, it was mainly influenced by global factors. The Indian currency had remained stable for the past few years, gradually depreciating by an average of 2% against the US dollar annually. However, in 2022, it faced a severe storm and plummeted by 10%, finally closing at 82.74 against the dollar.
In CY22, Foreign Institutional Investors (FIIs) have withdrawn approximately Rs 2.75 lakh crores from the Indian market. The US dollar has been gaining strength due to various global factors, such as the ongoing Russia-Ukraine conflict, a sluggish global economy, and concerns over rising inflation levels worldwide. As a result, the US bond yields have surged, causing an appreciation in the value of the US Dollar.
Major global institutions, including the IMF and the World Bank, have lowered their global growth projections for 2023, citing a slowdown in the world’s three largest economies – the US, China, and the Eurozone. According to the IMF, global GDP is expected to decelerate from 6.1% in 2021 to 3.2% in 2022 and 2.7% in 2023. While the US and China are anticipated to experience GDP slowdowns of 0.5% and 3.2%, respectively, the UK economy is forecasted to suffer its longest recession on record. All these factors may lead to a decline in the value of the Rupee.
Steps taken by the RBI
To maintain stability in the foreign exchange (forex) market and safeguard the value of the Indian rupee, India’s Central Bank, the Reserve Bank of India (RBI) has recently been involved in heavy interventions. Because of these interventions, the country’s forex reserves have been depleted by a significant amount of $70 billion, with the total forex reserves standing at $562.81 billion as of December 23, 2022.
Despite the decrease in forex reserves, the central bank has now shifted its focus towards rebuilding its reserves. By accumulating reserves, the RBI aims to create a safety net for the country’s economy against any future economic uncertainties. These uncertainties could include global factors such as a rising dollar, geopolitical tensions, or domestic factors such as high inflation or a slowdown in the economy. A landmark decision by the Govt and framework developed by RBI is the trade settlement in Rupees with about 18 countries. This will surely add to the strength of the Rupee in coming months.
Overall, rebuilding the forex reserves would not only help the RBI maintain stability in the forex market but would also serve as a buffer during times of uncertainty, enabling the country to handle any economic shocks that may arise in the future.
Rupee in 2023
The Indian rupee is expected to experience less pressure in the year 2023 as compared to 2022. This is primarily due to the anticipated global economic slowdown, which may lead to a potentially weaker US dollar and lower commodity prices. These factors, in turn, may lead to lower imports, which would reduce the demand for foreign currency and provide some relief to the Indian rupee.
In addition, the Indian government’s annual Economic Survey has projected a growth rate of 6% to 6.8% in FY24. However, this is a slowdown from the 7% growth projected for the current year ending on March 31. The reason for the expected slowdown is the possibility of a global economic slowdown that could negatively impact India’s exports.
Indian Economy in 2023
Despite the projected slowdown, the Indian economy is expected to remain resilient due to the government’s emphasis on structural reforms, which are aimed at promoting sustainable and inclusive growth. The government has taken various measures to boost economic growth, such as introducing policies to improve the ease of doing business, promoting entrepreneurship and innovation, and investing in infrastructure and technology.
Overall, while the global economic slowdown may pose some challenges to the Indian economy, the government’s efforts to promote economic growth and structural reforms, coupled with a potentially weaker dollar and lower commodity prices, may provide some relief to the Indian rupee in the year 2023.
