Indian Rupee seems to have no respite, even after falling 11% in 2022

USDINR pair seems to have no respite and depreciated even during the last month of 2022, falling more than 10% for the year. The rupee weakened on broad dollar strength, narrowing yield differentials with the US and widening the balance of payments deficit. The year 2022 saw one of the steepest falls in forex reserves, due to RBI intervention and valuation losses.

Indian Rupee 12M forward yields fell to a 14-year low in December, amid plunging yield differentials with the US coupled with RBI intervention in forwards.

On the economic data front, &P Global India Manufacturing PMI climbed to 57.8 in December 2022 from 55.7 in the prior month, pointing to the highest reading since October 2020 and marking the 18th straight month of expansion and infrastructure output also rebounded in November 2022.

RBI’s monetary policy committee members hinted at rate cuts in 2023 as global growth concerns mount. Even though rate cuts aid growth, they will lead to lower forward yield premiums.

The dollar index fell by almost 0.8% in the previous week and closed at 103.5. The slowing US economy and a looming recession improve the conviction among traders that Fed might cut rates in 2023 and is nearing terminal rates. Though FOMC has projected 5.1% peak rates in 2023, markets are not ready to price that in, leading to weakness in the dollar index.

Bank of Japan unexpectedly increased the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25% in December, leading to more weakness in the dollar index. The move came just days after the Japanese government was reportedly planning to revise a decade-old accord with the BOJ to add flexibility to the 2% inflation target.

Outlook for the week

US Labour data and FOMC meeting minutes are going to be the major events for the week. After a few calm sessions, volatility is set to return to the markets. FOMC minutes might telegraph prospects of a slower pace of rate hikes in the coming meetings, which might be interpreted as a dovish stance by markets.

The Jobs market has been cooling down for the past few months, as rate hike effects eat into the economy. Lower than expected Non-farm payrolls might lead to further weakness in the greenback on improving conviction that Fed might offer a helping hand in 2023. Hawkish guidance and comments from ECB are supporting Euro, as the inflation in the area still hovers in double digits.

The rupee spot might continue to be under further pressure amid lower forward yields, elevated crude oil prices leading to a higher trade deficit, and a looming recession testing investor’s risk appetite. A slowdown in the global economy might lead to a fall in exports, which might outpace the decline in imports. RBI is near the terminal rates and is expected to start cutting rates in 2023, while Fed is expected to keep rates at higher levels in 2023, adding to Rupee pressure.

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