Roller-coaster ride for rupee ahead

„Currency seen hitting 78 levels in 2022

With the resurgence of the third Covid-19 wave, US Federal Reserve accelerating the rate of unwinding its bond purchases and widening domestic current account deficit, the rupee is likely to be on a rollercoaster ride in the new year. While bearish rupee calls are rising with many analysts expecting the rupee to touch 78 levels in 2022, but this could be short-lived as most expect the rupee to swing both sides in a wide range through the year. The signs are already visible with the domestic unit declining 2.2 per cent this quarter as foreign investors pulled out $4 billion from the country's stock market.

During the calendar year 2021 (till date), the rupee depreciated 3.50 per cent against the dollar. In comparison, Thai baht was the worst performer having depreciated 12 per cent, Malaysian ringgit 4.62 per cent, followed by Mexican peso 4.48 per cent. Chinese yuan was the only emerging market currency that witnessed an appreciation of 2.35 per cent.

Says Ritesh Bhansali, vice-president, Mecklai Financial Services, "The rupee made a life time high of 76.90 in May 2020 with the onset of the Covid pandemic and gradually stabilised to 72.30 during the course of this year. With the resurgence of the third wave of the pandemic and with globally central banks ending large-scale purchases, 2022-2023 will be a roller-coaster ride for the rupee, bond market and equities. However, for the rupee, it will be a two-way movement as we don't anticipate a significant depreciation. It could touch 78 levels in 2022 but this will not sustain and it will recover to 76 to 74 levels during the course of the year."

The US Fed announced this month that it will stop infusing fresh stimulus into the US economy from March and the Fed's projections indicated three to four rate hikes of 25 basis points in 2022.

This is negative for stocks, rupee and bonds since the higher US yields will make global investors pull out money from emerging markets into US bond markets.

If we look at the yearly FPI inflows, 2020-21 received the highest ever inflow of Rs 2,74,032 crore but this has been reversing with FPIs pulling out Rs 13,550 crore in October and Rs 13,470 crore during December so far.

Growth-inflation set-up is different for developed markets (DMs) and emerging markets (EMs) this time around vis-a-vis last lift-off by the Fed after global financial crisis. Inflation in DMs is partly due to massive fiscal and monetary stimulus-led demand boost as well as shipping and logistic bottlenecks. Inflation in EMs is more due to the spillover effects of resulting commodity price increases, and not much on account of demand pull. History tells us that Fed has reacted more sharply--both in terms of pace as well as the terminal rate--when caught being behind the curve, and in fact overshoots in a bid to reclaim its credibility. Thus, the rupee is weakening due to three (not unrelated) factors---a) dollar strengthening per Fed's action, b) portfolio outflow from India and c) worsening trade balance in the last three months. Current account deficit may actually breach 2 per cent of GDP mark in 3QFY22 going by the current trend in trade balance and capital flows, said Jay Shankar, head of economic research at Incred Capital.