Rupee Asia’s worst-performing currency; why and what the future holds

The Indian rupee has become Asia’s worst-performing currency, as the rapid depreciation has resulted in foreign investors exiting the Indian stock market. The INR is already down by 2.2 percent against the USD just in this quarter, which has triggered foreign investors to pull out $4 billion from India’s capital market, reported Bloomberg. This is the highest among countries where data is available.

Issues like higher than reasonable valuations, a widening trade deficit, and the Reserve Bank of India’s divergence with the Federal Reserve over interest rates also gave an impetus for foreign investors to exit Indian equities.

“The monetary policy divergence and widening current account gap have set depreciation in the rupee in the near term," B. Prasanna, Head of Global Markets, Sales, Trading and Research at ICICI Bank, told Bloomberg.

While a weaker rupee means that exports from India are much more attractive, the rise in the cost of imported goods can quickly contribute to imported inflation. For India, which is still a net importer of energy, this can quickly cause a spiralling rise in prices.

However, on December 21, the rupee surged by 31 paise to close at 75.59 (provisional) against the US dollar, as positive domestic equities and a weak American currency in the overseas markets boosted investor sentiment.

Some are already expecting a bearish market for the rupee in the near future, with QuantArt Market Solutions expecting the INR to hit 78 per dollar by end-March and Bloomberg survey of traders and analysts forecasting INR to hit 76.50 per dollar instead. This has been the fourth straight year of loss for the INR.

Inflows of foreign capital through large primary listings like the Life Insurance Corporation of India, among others, may contribute to softening the fall of the INR, expects UBS AG.

The changing global economic landscape and the unprecedented action needed to support national economics during the COVID-19 pandemic had led to several currencies seeing extreme depreciation in the past year.