New Delhi: Fitch Solutions on Friday revised its forecast for the Indian rupee to average INR 76 per US dollar in 2022, slightly stronger than its previous outlook of INR 76.50. According to the agency, the rupee will mostly trade sideways in the coming quarters.
In the long term, it expects the Indian currency to remain weak–it may average INR 78 in 2023. However, any depreciation will be gradual given strong economic fundamentals, it added. In the current year, the rupee has averaged around INR 73.90.
“India has built up significant reserves of about $640 billion, which is equal to about 12 months of import cover and should provide the central bank with space to intervene in exchange markets to manage the pace of depreciation if they wish to. We expect the Reserve Bank of India to hike interest rates by 50 basis points in 2022, which should also protect the currency slightly from any capital flight, Fitch Solutions said.
Besides, foreign interest will remain strong in India for two reasons. First, the Indian economy will grow by an average of 8.1% over 2021-2022, marking the fastest growth among large emerging markets. Also, India will increasingly play an important geopolitical role in the region as US-China tensions remain elevated. The stronger diplomatic, trade and military relations between India and the US would further lend support to the rupee, it added.
The agency has underlined several factors that will prevent the Indian rupee from appreciating too much over the short term. One, the US Federal Reserve’s hawkish pivot in recent weeks will keep upside pressure on the greenback over the short term and is in contrast to the Reserve Bank of India’s accommodative stance. Second, concerns over the Omicron variant are also causing volatility for global markets, which could cause some weakness for the rupee.
Finally, the recent strength of India’s external sector is starting to dissipate and will see the current account flipping back into deficit as import growth remains stronger than export growth amid a strong recovery in demand as well as still-elevated oil prices, it said.
“A combination of stubborn inflation and a more aggressive Fed could pose a downside risk and may lead to greater volatility for emerging markets currencies such as India. On the upside, a faster-than-expected move towards treating Covid-19 as endemic in India and globally could see a normalisation of the Indian economy and a period of stronger risk appetite globally, Fitch noted.
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