Narrowing the US-India interest rate differential will pose challenges

Indian rupee is likely to remain between 80 and 84 rupees against the dollar in the first 3 months of 2023. Money coming from abroad will help the rupee. However, to widen the Current Account Deficit (CAD) and the US and narrowing the interest rate differential between India will pose challenges.

Rupee may strengthen in January due to dollar inflow. Also, it is expected that the Reserve Bank of India will not allow the currency to depreciate before the presentation of the Union Budget on February 1. In 2022, the rupee has decreased by 10 percent.

The worst performance of the rupee since 2013 has been in 2022. War in Europe and the US Rate hikes by the Federal Reserve prompted investors to flee emerging markets.

The situation may improve a little. In the last 2 months, the rupee has depreciated properly. There is a possibility in the new year, we may see some dollar flow. It is unlikely that the market will move to Rs 83 per dollar. Even if it goes to this level, it will not last. The budget is also coming. Before the budget, it does not seem that the Reserve Bank and the government will allow the rupee to depreciate too much. Due to India's low growth rate and capital flows to the US, the dollar continued to strengthen in emerging markets and this also affected the rupee.

In 2023, there are signs of a slowdown in inflation abroad and in India. Central banks, especially the Fed, may pause after 2 more rate hikes in 2023. Seasonal inflows from abroad will support the Indian rupee in January-March. This support can also come from the Central Bank. It is expected that the rupee will close in the range of 81 to 83.5. Seasonal factors and market expectations of further easing from the Fed will limit it to 83.50. If the dollar weakens, the Reserve Bank can increase foreign exchange reserves. which will prevent the rupee from falling below 81. The central bank uses its foreign exchange reserves to support the rupee. In 2022, the foreign exchange reserves of the country have increased to about 70 billion dollars.

A major challenge facing the Indian currency is the widening current account deficit. CAD rose to an all-time high of $36.4 billion in the quarter ending September 2022. Which is 4.4 percent of the country's GDP as the trade deficit widens.

The rupee is also under pressure to narrow the gap between the rates in the US and India. Because of this, some stakeholders are expecting a fall in the rupee by March. He expects the rupee to touch 83.5 to 84 per dollar.

By the end of March, the rupee will reach 84 against the dollar. Because the US The monetary policy is continuously tightening. In such a situation, the rate differential is going against India. While the balance of payments situation is improving.

But there is no quick fix. The Reserve Bank will buy some dollars to replenish its reserves. However, 2023 is not expected to be as volatile as 2022, but there may be some cycles of weakness.