Rupee may hit 80/$ aided by trifecta of softer rates, cooling crude and stronger macros, say analysts

• A confluence of three factors has resulted in the US dollar weakening against many major currencies of the world.
• After briefly edging towards the 83 mark against the US dollar in October, the rupee has recovered, appreciating by over 2% in the last one month.
• Amongst the key drivers for the fall in the dollar index is the expectation of the US Fed to go softer on rate hikes.
• Analysts now expect the rupee to appreciate to 80 against the US dollar on the back of improving macroeconomic data, slower rate hikes, and cooler crude oil.
• Falling exports could create pressure on the rupee – exports fell 16.65% in October to $29.78 billion when compared to the same period last year.

The Indian rupee could be headed towards 80 against the US dollar, according to analysts, as a confluence of three factors has resulted in the latter weakening against many major currencies of the world.

After briefly edging towards the 83 mark against the US dollar in October, the rupee has recovered handsomely, appreciating by over 2% in the last one month. In this period, the dollar index fell around 6%.

A key driver for the fall in the dollar index is the expectation that the US Fed would go softer on rate hikes.

The recent commentary by US Federal Reserve chair Jerome Powell has further helped the rupee shore up its gains – in the last five days, the rupee appreciated 0.7% against the US dollar.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said during a speech at the Brookings Institution.

“The Fed chair Jerome Powell in his speech hinted towards a slower tightening pace starting December. This lightened up the mood of the market and pushed the dollar lower,” said Anindya Banerjee, VP - currency derivatives and interest rate derivatives at Kotak Securities.

The Reserve Bank of India has said it has spent $86.36 billion to shore up the rupee against the US dollar in 2022 so far – it doggedly defended the 80 levels, but loosened up its intervention after the 80 mark was breached in September.

Not just rate hikes – cooler crude, optimistic global sentiments to help

While Fed chair Powell’s recent comments on slowing down the pace of rate hikes has helped the rupee – amongst other global currencies – analysts at ICICI Direct believe two other factors could also emerge as tailwinds.

“Rupee is likely to appreciate further in the month as the dollar is losing its steam. Further, rupee may gain strength on optimistic global market sentiments and foreign institutional investor (FII) inflows. Additionally, softening crude oil prices may be supportive for the domestic currency as it will reduce the Import bills,” said ICICI Direct.

For context, November was the best month in 2022 as far as FII flows are concerned – foreign investors purchased equities worth ₹22,546 crore during the month. August is the only other month in 2022 when FII flows were positive, with net purchases of ₹22,026 crore.

Brent crude oil prices have declined 9.3% in the last one month, from $95.9 per barrel to $87. According to the US Energy Information Administration, Brent crude oil prices are forecast to average $95 per barrel in 2023.

“USD-INR may slip further till 80 as long as it sustains below 82.30 levels,” ICICI Direct added in its report.

‘Better-than-expected’ macroeconomic data too supporting rupee

India’s Q2 FY23 gross domestic product (GDP) growth came in at 6.3%, marginally above the 6.2% levels expected by economists. This, coupled with improvements in other macroeconomic data like industrial production and services and manufacturing PMI (purchasing manager’s index) has acted as support for the rupee, according to analysts.

While industrial production rose 3.1% in September compared to a year ago, services PMI rose to 55.1 in October from 54.3 in September.

Another positive factor is the rise in salaried jobs in an otherwise deteriorating employment market – according to the latest CMIE report, India added 8.5 million salaried jobs in September-October 2022. Overall, salaried jobs stood at 86 million in September, and 84.7 million in October – the highest in any month since the beginning of the Covid-19 pandemic.

While these factors are helping the rupee shore up its gains, Banerjee says that the movement in the near term could be range bound.

“In the sessions to come, as long as the pair manages to sustain above the 81 mark, we might see a range bound action between 81 and 82,” Banerjee said.

On the other hand, falling exports could create pressure on the rupee – exports fell 16.65% in October to $29.78 billion when compared to the same period last year.

Fiscal deficit – the difference between revenue and expenses – also widened in April-October 2022 to ₹7.58 lakh crore, or about 45.6% of the FY23 target of ₹16.61 lakh crore.

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