Rupee has declined over 10% since last Oct average rate of 74.85. It closed at 82.67 on Friday. One year decline of 10% is not totally new to Rupee. In 2017-2018 Oct to Oct period, Rupee declined 14.2% (from 64.75 to 73.95). Rupee declined 11.35% during Feb 2015-Feb 2016 period. (from 61.65 to 68.42). Rupee declined 18% (from 55.50 to 65.72) during Aug 2012-2103 Aug period. Though short term volatility leading to 10 to 18% Rupee decline has been seen, 5 Year decline of 29% on rolling basis is not common. Even during the 2008-2013 period, Rupee decline halted at around 29% over a 5 year period.(from 47.80 on Dec 2008 to 61.80 in Dec 2013). As on Oct 2022, Rupee has declined from 63.87 to 82.67 (29.74%). This has come despite high FX reserves and better domestic macro economic conditions. During 2012-2103, Rupee’s decline could be attributed to FII outflows as a result of retrospective taxation proposal and mounting CAD. Current account deficit exceeded 4% during 2012-13, forcing Govt to regulate Gold imports.

What is now contributing to Rupee’s steep decline:

-Steep climb in Fed funds rate and US 10 Year Yield crossing 4.25%.  Fed’s hikes have led to a near 18% jump in the dollar index this year and has prompted investor to pull out capital from emerging market assets.

-FII outflows of around 1.5 lac Cr in this calendar Year.

-Average Crude Oil price at USD 100.

-Indian average monthly trade deficit is $23.2 billion for the first nine months of this calendar year, compared to an average of $15.3 billion in 2021.

-CAD is expected to be around 3.1% of GDP this Year. CAD was $23.9 billion in the April-June period. (2.8% of GDP)

-Rally in USD index.

-Fall in Currencies like Yen and Yuan.

-Fall in USDINR fwd premia have encouraged importers to hedge exposures.

Recent Macro economic indicators:

-Inflation remained stubbornly high at 7.4%.

-Repo rate is now at 5.9%.

-IIP contracted -0.8% in Aug. Apr-Aug IIP grew by 7.7% as compared to Apr-Aug 2021

-S&P Global India Manufacturing fell to a three-month low of 55.1 in September 2022 from 56.2 in August, missing market estimates of 55.8. Still, this was the 15th straight month of increase in factory activity, despite global headwinds and growing recession risks

-S&P Global India Services PMI declined to 54.3 in September 2022 from August’s of 57.2, and below market consensus of 57.

-India’s trade deficit was downwardly revised to USD 25.71 billion in September of 2022, compared to a preliminary estimate of USD 28.72 billion and USD 22.47 billion a year earlier. Imports surged 8.7 percent year-on-year to USD 61.16 billion amid higher commodity prices, while exports rose at a slower 4.9 percent to USD 35.45 billion.

-FX reserves stands at USD 528.36 bn, down from a peak of USD 650 bn.

-The yield on the 10-year Indian government bond rose to the 7.5% mark in October, the highest in four months and is approaching the three-year high of 7.6% hit in June as expectations of aggressive and prolonged interest rate hikes by the Federal Reserve lifted bond yields worldwide.

-Indian Equity indices have outperformed Global Indices. Nifty is at 17730, down only 5% from all time highs.

-GST Collections are above 1.45 lac Cr consistently.

-Total passenger vehicles sales in India surged by 9.3 percent month-over-month to 307,389 units in September 2022, recovering from a 4.3 percent fall in August, as crippling semiconductor shortages ease.

Expectations: GDP is set to climb 7% in 2022-23 as per RBI. However, major institutions have downgraded growth to 6% due to Global economic conditions.

RBI’S action: RBI has been selling USD at various levels to smoothen volatility. RBI sold USD at 83.25+ levels. RBI has spent over USD 100 bn from its reserves. But for intervention, Rupee may have declined past 85. RBI has also been active in fwd markets. Buy/Sell swaps have been done regularly to manage liquidity. Fwd premia has declined steeply with 1 year at 2.5%, indicating that Fed is ahead of RBI in rate hike. US-Indian 2 Year yield difference is only 2.63%. 2 Year G-SEC is at 7.13% and US 10 Year G-SEC is at 4.5%.

What to expect:

-US Fed will hike rates till Dec end aggressively and may moderate monetary policy in Q1 2023. This could pave the way for Rupee to find a low by Dec and then turn around for gains in 2023. However, RBI may mop up USD on any decline and shore up reserves. Hence, we expect a USDINR top by Dec or early next year with modest pull back of Rs 3 to Rs 5 next year. Based on present developments, expect 84.50-85.50 by Dec end or early Jan 2023 and then a pull back to 80 by next year.

Suggestion: USD Imports be covered.

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