With foreign funds fleeing the country’s markets, the Indian rupee is destined to end a turbulent year as Asia’s worst-performing currency. The currency fell 2.2 percent this quarter as international funds withdrew $4 billion from the country’s stock market, the largest of any regional market for which data is available.
Foreigners fled Indian stocks after Goldman Sachs Group Inc. and Nomura Holdings Inc. reduced their equities outlooks, citing high valuations, at a time when fears about the omicron virus variant roiled global markets. The rupee’s carry appeal has also been harmed by a record-high trade deficit and the central bank’s policy divergence from the Federal Reserve.
“The rupee is set to depreciate in the near term due to monetary policy divergence and a rising current account gap,” said B. Prasanna, head of global markets, sales, trading, and research at ICICI Bank Ltd in Mumbai.
The Reserve Bank of India faces a double-edged sword as the rupee depreciates. While a weaker currency may help exporters in the wake of the pandemic, it also increases the possibility of imported inflation, making it more difficult for the central bank to keep interest rates at record lows for much longer.
QuantArt Market Solutions predicts the rupee will fall to 78 per dollar by the end of March, breaking the previous low of 76.9088 set in April 2020, while a Bloomberg survey of traders and economists predicts the rupee will fall to 76.50. The rupee is expected to lose approximately 4% this year, marking the fourth consecutive year of losses.
Stocks on the Verge of a Bear Market
The benchmark S&P BSE Sensex Index has fallen by roughly 10% from its all-time high reached in October, owing to a foreign flight from stocks. Despite this, the Sensex’s one-year forward price-to-earnings ratio is at 21, compared to 12 for MSCI’s Emerging Markets Index, indicating that the shares have room to fall considerably further. This quarter, bond outflows were $587 million.
As India’s trade imbalance increased to an all-time high of roughly $23 billion in November due to greater imports, bearish rupee calls are increasing. According to Goldman Sachs, the plentiful liquidity in the banking sector, which was partly produced by the RBI’s dollar purchases, may make it harder for the central bank to act to the same amount in 2022 to prevent rupee depreciation.
Even then, not everyone is pessimistic. According to UBS AG, a likely reversal in foreign inflows in the coming quarter due to share sales in companies such as Life Insurance Corp. of India, dubbed as India’s largest initial public offering, could cushion the rupee.
The rupee rose 0.2 percent to 75.9163 per dollar on Monday, fueled by rumours that the central bank intervened to stem the currency’s losses.
“We see one-off flows and favourable 1Q current-account seasonality to come into play,” said Rohit Arora, emerging market Asia strategist at UBS. “As long as oil remains under control, the rupee should conclude the fiscal year lower than where it is now, maybe in the 74-75 zone.”
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