Outlook 2023: Here’s why rupee will depreciate against dollar in H1

We expect Rupee to depreciate against the US Dollar in H1 2023 as the global inflation and economic concerns continue to dent risk sentiments. Supply chain disruptions and food inflation are also expected to extend from 2022 into 2023. Russia-Ukraine conflict has failed to reach any solutions, and any possibilities of a truce look rather remote in foreseeable future. Resurgence of COVID-19 may also plague the markets. Most global institutions such as the IMF and the World Bank have revised global growth forecasts lower for 2023 due to slowdown in world’s three largest economies – US, China and the Eurozone.

IMF projects global GDP to slow from 6.1% in 2021 to 3.2% in 2022 and 2.7% in 2023. While US and China’s GDP are expected to slow down to 0.5% and 3.2%, respectively, UK economy is expected to slip into the longest recession on record. All these factors may put pressure on risk currencies such as Euro, Pound and Rupee.

Also read: Eight key factors that moved stock market in 2022

Although outlook for the Indian currency looks weak in the near-term, we do not expect sharp downside extending for a prolonged period as India is expected to remain as the best performing major economy which may be supportive for Rupee at lower levels. India’s GDP is forecast to expand by 6.8% in 2023. Since India is expected to grow at the fastest pace, the second half of 2023 may be positive for the domestic currency. It is to be noted that over the past couple of months we have seen inflation cooling down in most of the advanced economies, driven partly by easing of crude oil and other commodity prices.

If commodity prices continue to remain under check, then we may see some narrowing in the ballooning twin deficits i.e. Current account deficit and trade deficit. The US Federal Reserve may take its foot off the rate hike pedal in the later part of 2023 as there could be visible evidence of inflation falling towards their target of 2%.

In 2023, we expect Rupee to trade in the rage of 80-85per dollar with further weakness possible in the first half of year. The USD/INR current market price (Spot) is ₹82.83.

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The author, Anuj Choudhary is Research Analyst at Sharekhan by BNP Paribas

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