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Currency Article 22 July 2022 By Ms. Heena Naik, Research Analyst - Currency, Angel One Ltd 

2022 is definitely one of the worst years that India could face. The rupee has crossed the 80-mark while the inflation rate is sitting above 7 percent; something that both local and global investors are worried about.

It all started with the US Fed rate hike where a lot was speculated and a lot had actualized, in terms of the rate hike. The world got more than they had anticipated. The US Federal Reserve hiked interest rates three times in 2022. The 1^st hike was by 25 bps, 2^nd was by 50 bps and the 3^rd one was by 75 bps. The committee has even hinted at some more aggressive hikes in the coming policies (a probable 75 bps rate hike in July’22 policy). All these actions undertaken by the US Feds have created a huge round of jitters and volatility across asset classes. From equities to currencies, markets were flooded with speculative bets which affected a lot of pockets.

The US Dollar Index gained strength by almost 12 percent in 2022, causing major discomfort in other shared currencies. A major reason why the Rupee has depreciated so sharply i.e., by 7.5 percent in a year. Another reason can be blamed on Russia-Ukraine-US. The war between Russia and Ukraine along with meddling by the United States has caused the global commodities specifically the crude to burst. Both NYMEX and Brent crude has shot up by almost 23.86 percent and 28.06 percent respectively.

The crude numbers do bother India as the country imports a major percentage of crude. And with the surging prices, the impact that India must suffer is huge. The trade deficit of India has widened considerably from a deficit of $18.51 billion in Mar’22 to a deficit of $26.18 billion in Jun’22 due to higher import bills. Indian oil companies are passing on the losses caused by higher crude to the consumers. Energy prices in India have been gradually seen on the rise which is affecting the common man.

Not only this, but the prices of food items, too, are also picking up, and with the latest GST revisions we can see another major spike in food inflation. Both fuel and food inflation has pushed India’s inflation rate above 7 percent (currently at 7.01 Jun’22). The manufacturing sector is stagnant. The service sector is the only fundamental that is on the rise, all thanks to the weak Indian currency. India’s annual GDP growth rate has reduced from 8.4 percent in Sep’21 quarter to the current 4.1 percent Mar’22 quarter.

The situation that India currently is stuck in is not a good place. The external factors have already distracted foreign investors from the Rupee-denominated assets and internal factors like state-level political drama, food mismanagement, etc. are worsening the case even more. Foreign outflows in 2022 have been around $ 29,940 million from India. Both the government and the central bank are trying hard to minimize the damage caused to the country but in vain. RBI’s rate hike and intervention have failed to impress the markets. The question is when will India be pulled out of this financial economic chaos. The answer is still uncertain as a lot of factors are global dependent. RBI feels that things will stabilize by Dec’22 which is enough to hold up the local investors but till how long?!

Considering certain uncertain factors, USDINR Spot (CMP: 79.94) is expected to remain in the bullish territory for some more time as the FOMC Policy is around the corner which may push the US Dollar Index higher. A possible uptrend towards 81.00 levels is very much possible in a monthly time frame. We may see some in-between strengths in the Rupee due to dollar selling by the RBI which would try its best to intervene. The overall bias in USDINR Spot is towards the upside.

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