Rupee, worst emerging Asia currency of 2022, likely to fall further

RBI may mop up any inflows to boost its foreign-exchange reserves, a move that may also work against the rupee

The Indian rupee, emerging Asia’s worst performer in 2022, is likely to extend losses in the next fiscal year, according to a top private bank in the country.

“A substantially wider current account deficit” in the next fiscal year will keep the rupee under pressure, Neeraj Gambhir, group executive for treasury, markets and wholesale banking at Axis Bank Ltd., said in a Bloomberg TV interview. 

“We haven’t seen a meaningful reversal of capital outflows that we saw for the best part of (fiscal) 2023.”

The rupee declined over 10% last year, weighed by a dollar bolstered by the Federal Reserve’s aggressive monetary policy tightening and India’s deteriorating external finances. The Reserve Bank of India may mop up any inflows to boost its foreign-exchange reserves, a move that may also work against the rupee, according to Gambhir. 

“RBI has used up a fairly large amount of reserves through the last year to manage the pace of depreciation,” said Gambhir. “If there is a flow back of liquidity into domestic markets, that would be used to build back those reserves.”

He, however, doesn’t expect any runaway depreciation, but a milder 2%-3% drop in the fiscal year starting April 1. The rupee was trading steady at 82.57 to a dollar on Friday.

Following are some other comments by Gambhir:

• The RBI is very close to the terminal rate. We are looking at 25-50bps more of hikes. Penciling in a 25bps hike in the February policy and will be data dependent after that
   
• As RBI’s policy normalization campaign ends, we see interest coming back in Indian bonds, given absolute yield levels. 10-year bonds will trade between 7.25%-7.5% for the next few months. Expect the path of fiscal consolidation to continue in budget
   
• The rupee bond issuance activity may pick up pace in the coming financial year. Sharp normalization of interest rates has affected sales this year
   
• Domestic bond market issuance has grown over the years because the regulators have nudged local firms to use the bond market besides the bank loan market for financing their funding requirements, and he expects that trend to continue
   
• NOTE: Axis Bank Ltd. remained the No. 1 rupee corporate bond manager for the 16th straight year, managing 19.2% of note sales in the calendar year 2022, according to Bloomberg-compiled data