The rupee could fall in value to around 77.5 against the US dollar in March 2023 as the widening current account deficit (CAD) due to higher energy prices and capital outflows due to interest rate hikes by the US Federal Reserve likely to put pressure on the local unit, a report says.

According to Crisil Ratings, the domestic currency is likely to settle at 76.5 against the US currency in March 2022.

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“The rupee is already responding to external tensions and we believe it will continue to decline in value, stabilizing around USD 77.5/USD by March 2023.

“Two factors will play a critical role in driving the weakness: higher energy prices that will widen the current account deficit, and US Fed rate hikes leading to some capital outflows,” the rating agency said in a report Thursday.

But as the Reserve Bank of India (RBI) is expected to continue to intervene in the forex markets (thanks to larger forex reserves) to manage volatility, a sharp depreciation of the rupee could be avoided, although it could face short-term volatility, so as long as geopolitical tensions continue, it said.

The US Federal Reserve has raised interest rates by 25 basis points (bps) and has announced six more rate hikes this year.

The agency expects the current account deficit to widen to 2.4 percent of GDP in fiscal 2023, compared to an estimated 1.6 percent in fiscal 2022 (with crude oil assumption at USD 85-90 per barrel for fiscal 2022). fiscal 2023).

“With the rising demand for dollars to pay for expensive oil imports, the depreciation pressure on the rupee will mount. In previous periods of crude oil price spikes, India has already witnessed a concomitant increase in the current account deficit and as a result a sharp depreciation of the currency,” the report said.

It further said that a rise in the US key rate hardens long-term yields (on Treasury bills) in the US, narrowing the interest rate differential between US assets and those in emerging markets.

This increases the relative attractiveness of US assets, leading to capital flows from riskier emerging market assets. As a result, demand for domestic currency is declining, putting pressure on depreciation, the agency said.

This time again, as global liquidity dwindles due to the unwinding of the US Fed and Fed rate hikes, foreign investors have been withdrawing money since October 2021.

“This fiscal year, they have withdrawn $13.1 billion as of February, the highest amount in the past decade. This points to additional downward pressure on the rupee due to capital outflows,” the report said.

However, the agency said that the depreciation of the rupee is likely to be relatively less compared to the taper tantrum episode of 2013, as the external account situation in India is more comfortable. The adequacy of foreign exchange reserves (about USD 630 billion) also acts as a shield.

“Expected fund inflows during the mega-initial public offer by the Life Insurance Corporation of India and the inclusion of Indian debt in the global bond index by the latter part of fiscal 2023 are expected to provide some support for the currency” , it said. †

This post Rupee set to fall to 77.5/USD in March 2023 on rising CAD, US Fed rate hikes : Crisil Report

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