Rupee has an appreciating bias, RBI likely to piggy-back on it
- The rupee has appreciated by 0.7% in the first week of May 2023 as compared to end-March 2023 and 1.4% compared to end-December 2022. Broad fundamental reasons have contributed to the recent appreciation of rupee, and these are likely to sustain.
- Trade position has improved with merchandise trade deficit coming down and services surplus increasing. The negative impact of weak global growth is likely to be more pronounced on merchandise exports than services exports. For quarter ending March 2023, services surplus is up 45% YoY and 5% QoQ.
- Current account deficit (CAD) for 3QFY23 came in 2.2% of GDP Vs 3.7% in the previous quarter. CAD witnessed a 41% QoQ reduction in 3QFY23. Global commodity prices have softened since September 2022. Concerns over weak exports growth stem from weak economic outlook for the US and EU, which account for over one-third of India’s exports. Despite the COVID-19 pandemic and global lay-offs workers’ remittances have remained steady throughout and are now above pre-pandemic levels.
- FIIs have turned positive. FIIs have been net buyers in the domestic markets to the tune of $1.6 billion in 2023 so far Vs them being net seller to the tune of $18.5 billion in 2022. Global risk-off sentiments have eased. Foreign direct investment inflows have remained steady and have totaled $36 billion during the first three quarter of fiscal 2023. This is likely to benefit going ahead from PLI schemes and ‘China+1’ sentiment.
- The RBI is shoring up its reserves. FX reserves stood have swelled by $27 billion since the start of 2023. Import cover has improved to 10.6 months in March 2023 from 8.5 months in September 2022.
We feel that rupee has a strengthening bias basis the underlying fundamentals. REER has been falling in the last 6 months reflecting an increase in India’s competitiveness and an appreciating bias for the currency. India remains the fastest growing major economy, and investor interest remains positive. Weak exports will get some cushion from fall in imports (on account of weak domestic growth and benign global commodity prices). India has emerged as the largest importer of sanctioned Russian oil (making up 20% of Indian’s oil imports). Reports suggest that Russian crude is available at a 25-30% discount to the global benchmark. So long as Russia remains under sanctions, India can cushion its import bill with cheap Russian oil.
The rise in global oil prices in response to the OPEC+ production cuts announced in April 2023 was short lived. Analysts estimate a global oil deficit in the second half of 2023 which could significantly push up oil prices. However, we feel that concerns over weak global growth will dominate sentiments and keep oil prices contained. This will keep broader commodity inflation in check too.
The US Fed has hinted at a pause going ahead and most major central banks are likely to follow suit. The US banking crisis, softening inflation and a pause by the Fed will keep dollar’s strength in check.
The RBI is likely to use this opportunity of positive fundamentals to build up its reserves, and at the same time keep Indian exports competitive by keeping the rupee appreciation under check.
Trade balance to support
rupee
Investor sentiment turns
positive
Liquidity surplus has reduced
significantly
Transmission of past hikes is
slow
Remittances have remained strong despite COVID and global lay-offs
CAD remains in a comfortable
position
RBI revises its GDP growth forecast
upwards
Inflation forecast is revised
downwards
INR is among the better performing currencies in 2023 with low volatility
Falling REER signals an appreciating bias for
INR
Real Repo Rate still below pre-pandemic levels
levels
RBI seems to be on the optimistic
side
RBI has been shoring up its
reserves
Commodity prices have been on a
downtrend
With a weak economic outlook and Fed pause, US dollar is losing its strength
CAD remains in a comfortable
position
US Fed is increasing its balance
sheet
Some hike, some don’t
.
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Team:
Anuj Agarwal, Chief Economist
Ria Rattanpal, Research Associate
Author:
Anuj Agarwal, Chief Economist
Ria Rattanpal, Research Associate
Disclaimer
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