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Indian rupee to turn increasingly volatile in 2022, but end the year stronger: Here’s why

Indian rupee
Indian rupee to turn increasingly volatile in 2022, but end the year higher: Here’s why
Image Credit: Bloomberg

Dubai: When it comes to sending money to India, it is vital to know whether it is currently an ideal time to remit. To understand whether it is or isn’t, one should first find out if your currency back home is expected to rise or fall in the days to come.

Here is an analysis of how the Indian rupee is expected to perform in the coming year, to help understand whether remitting money now is profitable or cost-effective, or should you wait it out for a few weeks for a better rate to come along.

Remittances to India from the UAE were seeing an uptick as remittance-beneficial rates were recorded in the past month. But how did the Indian rupee fare against its global peers in 2021? Will the currency strengthen or weaken in 2022, and why?

The Indian rupee fell in 2021, but bested its peers

In 2021, Indian rupee depreciated about 2 per cent against the US dollar, its fourth straight year in the red. But it outdid its peers such as Japan’s yen, South Korean won, South African rand and European Union’s euro, which depreciated by 11.5 per cent, 10 per cent, 8.5 per cent and 8 per cent respectively.

Against the UAE dirham, the Indian rupee closed the year on firmer footing, with the exchange rate at Rs20.19 for a dirham – the lowest it has been in December. This was a turnaround from earlier in the month, when the talk was that the rupee could drop past a new low of 21 to the UAE dirham.

Will the Indian currency rise or fall in 2022?

In light of abundant foreign exchange reserves in India and strong performance of the rupee vis-a-vis its global peers, the Indian rupee’s depreciation beyond Rs78 (Dh3.86) per US dollar in 2022 is unlikely, analysts at India-based lender and investment broker ICICI Direct Research evaluated in its recent note.

The Indian rupee started the year 2022 on a muted note at Rs74.43 (Dh3.68) against the greenback. The rupee’s new-found strength is attributed by analysts to the US dollar’s weakness, and that’s directly caused by the increased number of Omicron cases worldwide.

Indian rupee, Indian currency
Will the Indian currency rise or fall in 2022?

INR to rise amid Omicron, policy tightening

India-based forex traders said growing concerns over the Omicron variant of COVID-19 and its impact on economic recovery as well as firm crude oil prices weighed on the Indian rupee these past weeks.

The rupee is likely to not drop beyond the Rs78 (Dh3.86) level, but instead strengthen back to Rs72 (Dh3.56) levels, against the US dollar, in coming months as “India seems to be in a better position to withstand any major shock from monetary tightening”, the analysts added.

However, some analysts opine how the rupee will continue its stable run in the next few months and then drop to around Rs77 (Dh3.81) to the US dollar by September, expecting it to be 4 per cent weaker than the current level.

Why will the Indian rupee strengthen in 2022?

In its outlook for the Indian currency, the analysts added that that unlike 2013 when the rupee had depreciated drastically after the US Fed announced monetary tightening, India currently holds the fourth largest forex reserve in the world.

In this circumstance, the Indian rupee has better footing to handle volatility induced by the US central bank’s tapering. Let’s next breakdown how the US central bank tapering and India’s ample forex reserves affect the Indian rupee’s prospects in 2022.

What does it mean by US central bank’s tapering?

The US central bank revealed plans to tighten monetary policy at a faster pace in light of rising inflation risks. The US Federal Reserve had earlier decided to start tapering — which refers to a reduction in the amount of bonds it purchases — at a pace of $15 billion (Dh55 billion) every month.

However, with the identification of a new coronavirus variant and US inflation running above target, this pace is expected to be accelerated, as per the minutes from the Fed meeting of policymakers. Interest rates in the US is expected to be hiked at least thrice in 2022, by 25 basis points each time.

Indian rupee
Why will the Indian rupee strengthen in 2022?

How will US central bank’s tapering affect INR in 2022?

This meeting was seen as a sign that the lender might hike interest rates faster to cool inflation and this could lead other central banks in economies elsewhere to follow suit, Dubai-based forex traders noted.

With fresh liquidity infusions by the Fed to stop by March 2022, global liquidity could be impacted significantly in the coming months. The Bank of England followed the Fed by commencing interest rate hikes in December.

This made foreign portfolio investors (FPIs) in India nervous, resulting in outflow of Rs171 billion (Dh8.45 billion) from Indian stocks and Rs123 billion (Dh6.08 billion) out of Indian bonds.

Who are FPIs in India?

Individuals or entities who invest in foreign portfolios are known as foreign portfolio investors (FPIs). In the Indian context, FPIs refers to registered overseas investor groups which include foreign institutional investors (FIIs) and qualified foreign investors (QFIs).

Stronger forex reserves to buoy INR

India’s forex reserves are equal to about 12 months of import cover, the research report pointed. “Further, with stability in oil prices and import cover of more than 10 months, the rupee should have enough cushion to withstand external shocks,” the report further noted.

(Import cover is the number of months of imports that could be covered for by a country’s international reserves. Import cover is an important indicator of the stability of a currency.) India’s total foreign exchange reserves are at $635 billion (Dh2.3 trillion) as on December 24, 2021.

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